Accrual is a term used in accounting when revenue and expenses are recognized before they have been realized. So what is accrued revenue? Read on to find out what the term 'accrued revenue' means and its significance in the accounting scenario.
Defining Accrued Revenue
What is accrued revenue? To understand this, it is important to understand what the term 'revenue' means. Revenue, as we all know is the money which a company receives in return for any goods or services offered by them. Thus, when a payment is received for goods sold or services performed, it is known as revenue earned. Revenue which is earned, but remains unclaimed is known as accrued revenue. This outstanding amount is usually displayed under the label of current assets on the company balance sheet. Normally transactions made on credit are not defined as adjustable truncations because they are done on credit. However, it is important to keep a note of accrued revenue and interest to maintain a record of the payment which a company owes from its creditors.
A typical example of accrued revenue would be an instance where the company provides service to a customer on daily basis and receives payments on monthly basis. If the company fails to bill the customer for one particular month, then that outstanding amount, which remains unearned, is entered in the company’s book of accounts as accrued revenue. It is the duty of the accounting department to keep a track of all types of accrued revenue, so that the company can secure all payments easily. Normally, adjustments in accrued revenues are made at the end of every accounting cycle, so that the cost and the revenue for that period can be properly matched.
Relevance of Accrued Revenue System
The concept of accrued revenue and the system of deferred payments is not used in all companies. A company, who uses it, refers to this system as a method of “adjusting entries" because accrued revenue is never static and changes every month. This unclaimed amount is usually adjusted at the end of every accounting cycle. However, in current circumstances, a lot of business transactions are carried out on credit and it is important to keep an accrual system operational to get a clear picture of the company’s financial standpoint.
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Significance of Accrued Revenue System
The accrual basis of accounting helps people understand the exact financial standpoint of a company in the market. For example, when a businessman goes to a bank to get loan, his current assets might not be enough to get that loan. Under such circumstances the accrued revenue comes to his assistance, and on the basis of the total amount of outstanding payments, an evaluation of his loan application is done and the loan is often granted. This is especially true for the construction industry where 90% of the work is done on credit and payments which come over a period of time. Besides the construction industry, accrued revenue also plays a big role in the rental industry, where unclaimed bills are grouped under the accrued revenue tag.