Accrued Revenue and Unearned Revenue
What is Accrued Revenue?
Accrued revenue is the revenue that the company already earned through providing goods or services to the customer, but the company has not received the payment from the customer regarding the goods or services provided yet.
Under the accrual basis of accounting, revenues should be recognized in the period they are earned, regardless of when the payment is received.
In this case, the company needs to recognize and record the revenue on the goods or services it provided to the customer even though it has not received payment from the customer for such goods or services yet.
Journal Entry for Accrued Revenue
The transactions that need to be recorded in the case of accrued revenue are:
- Accounts receivable: it is recognized as a current asset in the balance sheet since the company has already provided goods or services; therefore, the company expects to receive the payment within 12 months.
- Revenue: it is the income statement item that the company needs to recognize as they already earned it when they provided goods or services to the customer.
The journal entry for accrued revenue is as below:
The journal entry to settle payment for accrued revenue is as below:
ABC Co. provided repair service to its customer in which it charged $150 for the service on 15 December 2018. The company has not received payment from the customer yet.
In this case, the company should recognize and record revenue of $150 on 15 December 2018 as below:
On 10 January 2019, the company received a cash payment of $150 on the service charged above from its customer.
In this case, the journal entry on 10 January 2019 would be to reverse the accounts receivable as below:
What is Unearned Revenue?
Unearned revenue or deferred revenue is the amount of advance payment that the company received for the goods or services that the company has not provided yet.
Under the accrual basis, revenues should only be recognized when they are earned, regardless of when the payment is received. Hence, the company should not recognize revenue for the goods or services that they have not provided yet even though the payment has already been received in advance.
The related account for advance payment that they received should be recognized as a liability in the balance sheet; no revenue should be recorded in the income statement yet.
Journal Entry for Unearned Revenue
The transactions that need to be recorded in the case of unearned revenue are:
- Cash: it is recognized in the balance sheet as the company already received cash payment in advance from the customer.
- Unearned revenue: it is recognized as a current liability in the balance sheet which will be settled with the revenue when it is earned in the future period.
The journal entry for unearned revenue is as below:
The journal entry to settle unearned revenue is as below:
On 30 December 2018, ABC Co. received $1,000 as a payment in advance from its client for a consulting service that it will provide from 02 Jan 2019 to 08 Jan 2019.
In this case, the company should recognize and record unearned revenue of $1,000 on 30 December 2018 as below:
08 Jan 2019, the company has provided and completed the consulting service to its client for the above advance payment.
In this case, the journal entry on 08 January 2019 would be to recognize revenue that the company earned and to reverse the unearned revenue as below: