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Learn how to create an accurate accounting entry for accrued revenue with this simple guide, ensuring your financial statements reflect true business performance.
For any business dealing with contracts or subscriptions, staying compliant with revenue recognition standards like ASC 606 isn't just good practice—it's a necessity. This is where a firm grasp of accrued revenue becomes non-negotiable. It represents the value you've delivered to customers before an invoice is even created. Failing to track it properly can lead to inaccurate financial statements, audit failures, and a loss of investor confidence. The core of this process is the accounting entry for accrued revenue, which officially records this earned income in the correct period. This guide will show you how to master this entry to ensure your financials are always accurate, compliant, and defensible.
Let's start with the basics. If you've ever felt like your cash flow doesn't tell the whole story of your business's performance, you're probably already familiar with the concept of accrued revenue, even if you don't use the term. It’s a key idea in accounting that helps you see your financial health with much greater clarity.
Ever finished a big project at the end of the month but knew the invoice wouldn't go out until the next? That's accrued revenue in a nutshell. It’s the money you’ve earned by delivering a service or product, but the cash hasn't landed in your bank account yet. In fact, you might not have even sent the bill. This concept is a cornerstone of accrual accounting, a method where you recognize revenue when it's earned, not just when it's paid. This distinction is so important because it separates your actual performance from your cash flow, giving you a clearer view of how your business is truly doing in a specific period.
Recording accrued revenue is all about accuracy. It ensures your financial statements, like your income statement, reflect the work you actually did during a period, regardless of payment timelines. This practice aligns with the matching principle, a fundamental accounting rule that pairs revenues with the expenses it took to earn them. By following this, you get a much more honest look at your profitability month-to-month or quarter-to-quarter. This clarity is essential for making smart business decisions, from budgeting for new hires to planning your next growth phase. It’s not just good practice; it’s a requirement for staying compliant with standards like ASC 606.
Let’s be honest, accounting has its share of terms that sound confusingly similar. Accrued revenue, accounts receivable, and unearned revenue are a classic trio that can easily get mixed up. But getting them straight is essential for a clear financial picture and accurate reporting. Think of it as the difference between money you’re about to ask for, money you’ve already asked for, and money you have but can’t count as yours just yet.
Getting these categories right is a cornerstone of ASC 606 compliance, which governs how you recognize revenue from customer contracts. When you have a high volume of transactions, keeping these streams separate and correctly timed can feel like a huge task. This is where having a solid system in place becomes a lifesaver, ensuring your financials are always accurate and audit-ready.
While all three terms relate to your revenue, they represent different stages of the earning process. The key difference comes down to two simple questions: Have you done the work? And have you sent the invoice?
Here’s the simple breakdown:
Knowing when to apply each term helps you recognize income in the correct accounting period, which is the whole point of accrual accounting.
Recording accrued revenue is a key part of accrual accounting that ensures your financial statements tell the whole story. Think of it as a three-step process: you make an initial entry to recognize the revenue you've earned, you make an adjusting entry to get your books right for the period, and then you reverse the entry once the invoice is sent and cash is on its way. It might sound like a few extra steps, but it’s what gives you a truly accurate picture of your company’s performance. Getting this flow right is fundamental to closing your books quickly and making strategic decisions based on real-time data. For businesses with high transaction volumes, this is where having the right systems in place becomes a game-changer, turning a complex manual task into a seamless, automated process. You can find more helpful tips on financial operations on our HubiFi blog.
The first step is to acknowledge that you've earned money, even if you haven't sent an invoice yet. To do this, you'll make a journal entry at the end of the accounting period. You will debit an asset account—often called "Accrued Receivables" or something similar—to show that you are owed money. At the same time, you will credit a revenue account, like "Service Revenue," to reflect the income you've earned. This simple entry gets the revenue onto your books for the correct period, which is the entire point of accrual accounting.
This adjusting entry is what officially places the accrued revenue on your financial statements for the period. It ensures that your income statement isn't understated just because you haven't billed the client yet. For example, if you completed a $5,000 project on December 31st but won't invoice until January, you’d make an adjusting entry to include that $5,000 in December's revenue. This gives you and any stakeholders a more accurate view of your financial health and performance during that specific period, keeping your reporting compliant and your insights sharp.
Once the next accounting period begins, you'll typically reverse the adjusting entry you just made. This might seem counterintuitive, but it simplifies your bookkeeping. You’ll debit your revenue account and credit your accrued receivables account, effectively zeroing out the accrual. Then, when you actually send the invoice to your customer, you can record it as a standard transaction: debit Accounts Receivable and credit Service Revenue. This prevents you from double-counting the revenue and keeps your regular invoicing process clean. Automating this workflow with the right integrations can eliminate manual errors and ensure your books are always accurate.
Accrued revenue isn't just an abstract accounting concept; it shows up in everyday business operations, especially when there's a lag between when you do the work and when you get paid. Recognizing it properly is the key to getting a true and accurate snapshot of your company's performance each month. If you only look at the cash in your bank account, you're missing a huge piece of the puzzle—the value you've already delivered to your customers.
Understanding where accrued revenue typically appears helps you set up the right processes to track it. For many businesses, especially those with high transaction volumes or complex contracts, manually tracking these earnings is a recipe for errors and missed revenue. This is where having a solid system in place becomes non-negotiable. Let’s look at a few of the most common scenarios where you’ll find accrued revenue.
This is the most classic example of accrued revenue. Think of it as money a business has earned by providing a service, even though you haven't sent the invoice or received the payment yet. For instance, imagine your consulting firm finishes a client project on March 30th. You’ve done the work and delivered the value, so you've earned that revenue in March. However, your process is to send invoices on the 1st of the month, so the cash won't arrive until April. Under accrual accounting, you need to record that income in March to accurately reflect your performance for that period.
For subscription-based businesses like SaaS companies, accrued revenue is a regular occurrence. It often pops up when customers make changes to their plans mid-cycle. For example, a customer might upgrade their subscription, add more users, or purchase a one-time service like data migration. You earn that extra revenue the moment the service is activated, not when the next billing cycle rolls around. Properly tracking these prorated amounts is vital for accurate financial reporting and is a prime example of where automated revenue recognition solutions can prevent revenue leakage and ensure compliance.
Accrued revenue is also common in businesses that handle long-term projects with payments tied to specific deliverables, or milestones. Think of a large-scale software development project or a construction build. You might complete 25% of the project in one quarter but won't receive payment until that milestone is formally approved. Even with the payment delay, you've earned a portion of the project's total revenue. Recognizing this income as you complete the work gives stakeholders a much clearer view of the project's financial progress and the company's health, which you can explore further in our HubiFi Blog.
Recording accrued revenue isn't just a box-ticking exercise for your accountant; it's a strategic practice that directly impacts your two most important financial reports: the balance sheet and the income statement. When you get this right, you move beyond simply tracking cash in the bank. You start to see a much clearer, more accurate picture of your company's actual performance and financial health.
This clarity is essential for making smart business decisions. Are you truly profitable this quarter, or is your cash flow just hiding underlying issues? Do you have the financial stability to invest in a new product line or hire another team member? Answering these questions confidently starts with understanding how the work you complete today affects your financials, even if the payment won't arrive until next month. By properly accounting for accrued revenue, you equip yourself with the data needed to guide your business forward with precision and foresight, rather than reacting to the unpredictable ebb and flow of cash receipts.
On your balance sheet, accrued revenue is listed as a current asset. Think of a current asset as something your company owns that you expect to convert into cash within a year. By recording revenue when you earn it—even before you’ve sent an invoice—you’re acknowledging an asset you have a right to. This gives anyone reading your balance sheet, from investors to lenders, a more complete picture of your company's value.
This is different from accounts receivable, which tracks money owed to you after you've billed the client. Accrued revenue captures the value you've created before that bill goes out. Having seamless integrations between your project management and accounting software is key to tracking these assets accurately without manual effort.
The income statement is where accrued revenue truly helps you tell an accurate story about your profitability. It ensures that your revenue is matched to the period in which you actually did the work, a core principle of accrual accounting. Without it, a month where you completed a huge project but didn't bill until the following month would look artificially unprofitable, while the next month would look unusually successful.
This practice gives you a stable, realistic view of your operational performance over time. It smooths out the lumpy nature of cash flow, allowing you to make better strategic decisions based on how your business is truly performing. You can find more insights on building accurate and reliable financial reports on our blog.
While the concept of accrued revenue is straightforward, putting it into practice can present a few challenges. Most issues boil down to two key areas: getting the timing right and having the proper systems in place to track everything accurately. When you’re juggling multiple projects or subscriptions, it’s easy for things to get missed, which can throw your financial reports off balance. But don't worry—these are common hurdles, and with a bit of foresight, you can clear them easily. The key is to be proactive and build a solid process from the start. By understanding where businesses typically stumble, you can set up your own accounting practices to avoid these pitfalls and keep your financial records clean and reliable.
One of the most frequent mistakes is failing to record accrued revenue in the correct accounting period. Let's say you finish a big project for a client on March 31st but don't plan to send the invoice until April. Under accrual accounting, that revenue belongs to March because that’s when you earned it. Recording it in April would inflate that month's performance while making March look weaker than it was. This timing mismatch can lead to inaccurate financial reporting, giving you a skewed view of your company's health. Getting the timing right ensures your balance sheet and income statement reflect a true and fair picture of your financial position at any given moment.
Manually tracking accrued revenue on spreadsheets can work when you’re just starting out, but it quickly becomes unmanageable as your business grows. Imagine trying to keep tabs on dozens of subscriptions or project milestones—it’s a recipe for human error. To manage accrued revenue effectively, you need a reliable system that can handle the complexity without manual oversight. The right setup ensures that your financial statements accurately reflect income that has been earned but not yet received. This is where automated solutions shine, as they can seamlessly connect with your other financial tools. Having strong integrations with your ERP and CRM creates a single source of truth, reduces errors, and gives you the confidence that your numbers are always audit-ready.
Recording accrued revenue isn't just about getting your internal books right; it's also about staying on the right side of tax authorities and accounting standards. Getting this piece of the puzzle wrong can lead to compliance headaches, audit issues, and financial penalties. Let's break down the two biggest areas you need to pay attention to: how accrued revenue is taxed and how it fits into the all-important ASC 606 guidelines.
When it comes to taxes, the government is interested in the income you've earned, not just the cash sitting in your bank account. This is the core idea behind the accrual basis of accounting, which the IRS requires for many businesses. This means your accrued revenue—the money you're entitled to for work you've completed—counts as taxable income for the period in which you earned it. So, even if you won't see the cash from that big project until next quarter, you still need to report it on your income statement now. This directly impacts your taxable income, making accurate tracking essential for paying the right amount in taxes and avoiding any surprises come tax season.
If you’ve dealt with financial reporting, you’ve likely heard of ASC 606. This is the primary revenue recognition standard, and it’s a big deal. The rule states that you must recognize revenue when you transfer goods or services to a customer. This often happens before you send an invoice, creating what we know as accrued revenue. For businesses with subscriptions, long-term contracts, or high sales volume, manually tracking these moments can be a huge challenge. Ensuring your records align with ASC 606 is critical for accurate financial statements and passing audits. This is where having the right systems in place becomes a lifesaver, as automated solutions can ensure you achieve ASC 606 & 944 compliance without the manual effort and risk of error.
Managing accrued revenue doesn't have to be a source of stress. With the right habits, you can keep your financial reports clean, accurate, and ready for anything—from a stakeholder meeting to an unexpected audit. It all comes down to establishing a solid process. By focusing on clear record-keeping, regular reviews, and smart automation, you can build a system that supports your business's growth and financial health. Let's walk through the three core practices that make all the difference.
This seems simple, but it’s the bedrock of reliable financial reporting. One of the most common slip-ups is failing to record accrued income in a timely manner, which can throw off your entire financial picture and lead to poor business decisions. To prevent this, establish clear internal controls for how and when accrued revenue is recorded. This ensures everyone on your team follows the same process, creating consistency. Accurate entries are essential for maintaining transparency and trust with investors and partners. Think of it as building a strong foundation—without it, everything else gets a lot shakier. For more tips on financial management, you can find helpful insights on our blog.
Once you have a system for recording accrued revenue, the next step is to check your work consistently. Set a recurring schedule—whether it's weekly or monthly—to review and reconcile your accrued revenue accounts. This regular check-in helps you catch small discrepancies before they snowball into major headaches. Failing to recognize revenue properly can lead to inaccurate financial statements, which could trigger penalties or audits. A consistent reconciliation routine is your best defense. It transforms month-end closing from a frantic scramble into a smooth, predictable process, giving you confidence that your numbers are always accurate and defensible. This proactive approach is key to maintaining ASC 606 compliance.
Manually tracking accrued revenue, especially for high-volume businesses, is not only time-consuming but also leaves the door wide open for human error. This is where automation becomes your most valuable player. Using an automated revenue recognition solution ensures your entries are consistently accurate and compliant with accounting standards. It streamlines your financial close cycle by handling complex calculations and adjustments automatically. This frees up your team to focus on strategic analysis rather than tedious data entry. With the right tools, you can connect your payment processors, CRMs, and accounting software to create a single source of truth for your revenue data. HubiFi offers seamless integrations to make this process effortless.
Getting accrued revenue right gives you a clear, honest look at your company's performance. But a few common slip-ups can easily throw your books off track. The good news is that these mistakes are entirely avoidable once you know what to look for. The goal isn't just to follow the rules, but to create financial reports you can actually trust to make smart decisions.
One of the most frequent errors is simply getting the timing wrong. It’s tempting to record revenue as soon as a deal is signed, but recognizing it too early can lead to serious compliance issues with accounting standards. On the flip side, waiting until the cash is in the bank means you’re not recording revenue in the period it was actually earned. This delay distorts your financial performance and can make a profitable quarter look weaker than it was, which is a problem for both internal planning and external stakeholders.
Another hurdle is failing to properly account for accrued revenue, which can create misleading financial statements. This often happens when teams rely on manual spreadsheets and inconsistent processes. Without solid documentation and controls, it’s easy to make estimation errors or forget an adjusting entry, leaving you with inaccurate figures that can impact everything from cash flow projections to investor confidence. These aren't just minor clerical errors; they have real consequences for your business's perceived health and your ability to pass an audit. The key is to build a reliable system that ensures every dollar is accounted for in the right place, at the right time. For many high-volume businesses, this is where automation becomes essential. A platform that handles revenue recognition for you removes the guesswork and manual work, so you can schedule a demo and see how to get your financials right every time.
What's the simplest way to tell the difference between accrued revenue and accounts receivable? The easiest way to distinguish between them comes down to one thing: the invoice. If you've done the work and earned the money but haven't sent the bill yet, that's accrued revenue. The moment you create and send that invoice to your customer, the amount moves from accrued revenue to accounts receivable. Think of it as the difference between knowing you're owed money and officially asking for it.
Why do I need to make a reversing entry? It seems like extra work. I get it, it can feel like an unnecessary step. However, that reversing entry at the start of the new period is a crucial housekeeping task. It cleans the slate so that when you issue the actual invoice, you can record it as a standard transaction without accidentally counting the revenue twice. It simplifies your regular bookkeeping and prevents your accounting team from having to track down and manually adjust for old accruals.
Does my small business really need to track accrued revenue? Yes, even if you're just starting out. While it might seem like an extra layer of complexity, tracking accrued revenue gives you a true picture of your profitability. If you only look at cash in the bank, you might make decisions based on incomplete information. Properly recording earned income helps you understand your performance month-to-month, which is vital for planning growth, applying for loans, or speaking with potential investors.
When exactly does accrued revenue turn into accounts receivable? The switch happens at the precise moment you issue an invoice for the work you've completed. Before that point, the earned income is an internal record on your books—an accrual. Once that invoice is generated and sent to the client, it becomes a formal, legally enforceable debt owed to your company, which is what we call an account receivable.
My business is growing fast. When should I stop using spreadsheets and consider an automated solution? The right time is usually when the manual process starts causing problems. If you find your team spending hours reconciling numbers, if you're constantly worried about errors, or if closing the books each month feels like a major ordeal, those are clear signs. Moving to an automated system isn't just about saving time; it's about gaining confidence that your financial data is accurate, compliant, and ready for strategic decision-making.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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