In this video you'll find out what accrued revenue means
and I'll show you how it works with an example.
[Music]
Hey there welcome back to Accounting Stuff.
I'm James and today we're going to cover accrued revenue in accounting.
This video is part of a miniseries I've put together on adjusting entries
so far we've covered prepaid expenses deferred revenue
and accrued expenses and today we're going to wrap things up
with accrued revenue. You can find the whole playlist up here
and I'll drop links to each video down in the description below.
And one more thing I've put together this cheat sheet
that summarises everything you need to know about
adjusting entries. This is all of the key points
that we've covered in this mini-series on one piece of paper
which you can print out and add to your notes.
I'll be up front with you I am going to charge for this
I want to keep putting out these videos consistently on a regular basis
and to do that I need to pay the bills.
But don't worry for the next 30 days this will be on sale so you
can snap it up for cheap and get the chance to support this channel.
You can find it linked up here and down below in the description.
Okay enough of that what is accrued revenue?
Accrued revenue is revenue that has been earned but not invoiced yet.
Sometimes you’ll hear it called unbilled revenue
but accrued revenue is what it's more commonly known as.
That was the definition but what does it really mean?
Accrued revenue is revenue that we've earned in the past
that we hadn't built the client for yet. So as of now
in the present we haven't raised an invoice yet
that'll happen later in the future. I think it's easiest if we think of this
in terms of a buyer and a seller. If we're the seller then we
provide goods or services to the buyer once we've done that
once the work is done we send them an invoice
and in return they send us the cash transaction complete.
We accrue revenue whenever we have provided goods or services
in the past that we haven't billed the client for yet.
At some point in the future we intend to raise an invoice
and after we've done that we'll receive the payment.
You might be wondering why do we do this?
Why do we even bother? It all comes down to the
accrual basis of accounting because in accrual accounting
revenue is recognised when it's earned not when cash changes hands.
The issue with this scenario is that we provided the goods or services
in the past. That's when we did the work
that's when we earned the revenue but we hadn't raised the invoice yet.
An invoice is prompts us to record transactions in our general ledger.
So under normal circumstances we wouldn't be recognising this revenue
until the invoice is raised which in this situation
would be sometime later in the future. So right now in the present we need
to post an adjusting entry into our general ledger to recognise the revenue
in the past when we earned it. Sound confusing?
It's all good things will become a lot clearer
with this example. I want you to imagine that
you're a web developer and I'm a small business owner
who's desperately in need of a website. I've checked out some of your work
and I have to say I'm impressed. So I hire you to design my website for $500.
It’s June 1st and you immediately get started.
Come the end of the month you finished up your work
and the web sites live. I'm happy with the finished product
and I'm ready to pay but the thing is
you're busy with another job so you don't get around to
raising the invoice until mid-July. Let's work through the adjusting entries
in this problem from your point of view. On June 1st do you have
any adjusting entries to post? No
you haven't done any work yet so you haven't earned any revenue.
What about June 30th? Yes
now you need to post an adjusting entry. Over the previous 30 days
you the seller
provided me with a service by designing my website.
You earned this revenue but you haven't raised the invoice yet
so you need to accrue this revenue into your books.
How do you do that? By posting a journal entry.
You need to recognise revenue in your income statement.
Revenue is the ‘R’ in DEALER a normal credit account
so credits increase revenue and debits decrease revenue.
Your revenue needs to go up so you credit your revenue account
in your income statement by $500. But where does the
other side of this transaction go? We're double entry accounting
so there's another side to this adjusting journal entry.
You've already recorded revenue in your income statement
so we need to temporarily hold the other side of this transaction
somewhere in your balance sheet in your accrued revenue account.
But is accrued revenue an asset or liability? Let's find out shall we?
Assets bring us future economic benefit whereas liabilities involve
a future economic sacrifice. You've already made an
economic sacrifice by providing me with a service in June
but you haven't been paid for this service yet.
You're going to see that economic benefit later in the future
so you need to recognise accrued revenue as an asset in the balance sheet.
Accrued revenue is always recorded as an asset in the balance sheet
and assets are the ‘A’ in DEALER normal debit accounts
so debits increase accrued revenue and credits decrease accrued revenue.
So you need to debit your accrued revenue account
to increase it by $500 in the balance sheet.
Nice one. Let's see how this adjusting entry
affects your general ledger using T accounts.
You have two T accounts a normal revenue account
in your income statement and an accrued revenue account
in your balance sheet. Remember when using T accounts
debits always go on the left and credit always go on the right.
You guessed it… So you credit the right-hand side
of your normal revenue account by $500 in your income statement
and you debit the left-hand side of accrued revenue in
your balance sheet by $500. This adjusting entry has allowed you
to recognise 500 dollars of revenue in your income statement in June
when you earned it. Okay let's fast-forward to July
what happens when you raise the invoice? You need to post another journal entry.
In this transaction you’re the seller
so you have raised a sales invoice. Sales invoices are
recorded in accounts receivable. Accounts receivable is a sub ledger
that tracks all of the amounts owed to you by your customers
it’s a type of asset the ‘A’ in DEALER
a normal debit account. So to record your sales invoice
you need to debit accounts receivable by $500
to increase it in your balance sheet. What's the other side of this journal entry?
You've debited something so now you need to credit something else
to keep your books in balance. Last month you took up $500
of accrued revenue in your balance sheet and now you're about to take up $500 more
of accounts receivable. You don't want to overstate your assets
so we can release that accrued revenue from your balance sheet.
Now accrued revenue is a normal debit account
so you decrease it by crediting $500 from the account.
How does this journal entry affect your general ledger?
Well now you've got three T accounts. Normal revenue in the income statement
accrued revenue in the balance sheet and accounts receivable
which is also a balance sheet account. When you raised the invoice in July
you debited accounts receivable by $500 and credited accrued revenue by $500.
You'll notice that your income statement
hasn't been touched. You have still recognised $500
of revenue in June when you earned it
but you no longer have any accrued revenue in your balance sheet.
Why? Because you raised a sales invoice
so this asset these amounts owed to you
have been transferred to accounts receivable in the balance sheet.
When I make the payment a few days later
you'll receive cash for your services. You'll need to debit your
cash account by $500 because cash is an asset
and credit accounts receivable by $500 to close the invoice.
This $500 asset which you initially held as
accrued revenue has jumped from account to account
in your balance sheet. To accounts receivable when
you raised the invoice and then to cash
once you received the payment for your services.
Like I mentioned at the start I've created a cheat sheet that
summarises adjusting entries I don't know about you but I always find
it easier to understand something if I can see it all
laid out for me on one page. So I've condensed all of the
key information from this adjusting entries miniseries
onto one PDF so that you can see the big picture
how it all works and fits together. Click on this box to check that out
and you can find all of the adjusting entries videos over here.
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and as always any questions let me know
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See ya!