What is Accrued Revenue?
Accrued revenue is revenue that has been earned in an accounting period but has not yet been billed to the customer or collected in cash — it represents work completed but not yet invoiced.
Definition
Accrued revenue is revenue that has been earned during an accounting period but has not yet been billed to the customer or collected in cash. It arises under the accrual basis of accounting, which requires revenue to be recognized when it is earned — that is, when the service has been rendered or the goods delivered — regardless of when payment is received. Accrued revenue is recorded as an asset (accounts receivable or a specific accrued revenue asset account) on the balance sheet until the invoice is sent and payment is received.
How Accrued Revenue Works — Example
Imagine a freelance project manager charges a monthly retainer of $8,000 for ongoing consulting services. The contract specifies that the client will be billed at the end of each quarter. In January and February, the project manager delivers consulting work but does not yet send invoices. In January, the project manager has earned $8,000 in revenue: Debit Accrued Revenue (asset) $8,000, Credit Revenue $8,000. In February, the same entry: Debit Accrued Revenue $8,000, Credit Revenue $8,000. By the end of February, $16,000 in accrued revenue is on the balance sheet. When the client is billed at the end of the quarter, the accrued revenue is cleared and replaced with an actual accounts receivable.
Accrued Revenue vs. Accounts Receivable
Accrued revenue and accounts receivable are both asset accounts, but they represent slightly different stages. Accrued revenue is used when work has been completed but an invoice has not yet been sent — there is no formal invoice number or billing yet. Accounts receivable represents amounts owed by customers for which an invoice has already been issued — there is a formal billing document with payment terms. Some accounting systems use a separate "Accrued Revenue" or "Unbilled Revenue" asset account until the invoice is generated, at which point it is reclassified to Accounts Receivable.
Why Accrued Revenue Matters
Accrued revenue is important because it ensures that revenue is matched to the period in which it was earned, per the matching principle of accounting. Without accrued revenue entries, a business would show artificially low revenue in months when work was done but not billed, and artificially high revenue in the month when invoices were finally sent. This distorts the financial picture. Accrued revenue also directly impacts cash flow planning: the balance sheet shows money that is owed to you but not yet billed, which is real value in your business even though it has not hit your bank account yet.
Accrued Revenue and the Tax Implications
Under the accrual basis of accounting (required for businesses with over $5 million in annual revenue, and optional for smaller businesses), you generally must recognize revenue when it is earned, not when it is paid. This means accrued revenue may be taxable income even before you receive the cash. If you use the cash basis for tax purposes (allowed for sole proprietors and small businesses), you only recognize revenue when cash is received. However, if you use the accrual basis for both books and taxes, accrued revenue is taxable in the period earned. Consult your accountant to understand which basis applies to your business and how to handle year-end accruals.