Unbilled Revenue Journal Entry
Unbilled revenue is the amount that a company earns after goods or services deliver but not yet billed invoice to customers. In real life, the company needs to perform service (or deliver goods) to the customers and process billing to collect money. In order to complete the billing process, company needs some documents such as a working completion report, goods received notes, and other documents that prove the works completed. Those documents must be acknowledged by the customers. It will help to prevent any misunderstanding during invoicing.
Due to the working process, not all completed works are billed on the same day. It will be a gap between delivery date and billing date, which can be a few days or weeks depending on the size and nature of business. At the end of accounting period, accountants need to record revenue regardless of invoice bills. This is the reason that unbilled revenue exists in the income statement of the company.
Moreover, in a construction contract, supplier is only allowed to bill based on percentage of completion. So the company may have completed some work but it is lower than the agreed percentage, so they cannot issue invoice yet. They need to record revenue based on work completed, so they need to use unbilled revenue.
Company needs to record revenue when it incurs to comply with accounting principles. At the end of accounting period, accountants need to ensure that all revenues are recorded in the same period. Even they are not yet bill invoices, they record based on purchase order or contract amount. These revenues will classify as unbilled revenue which is a separate account to control.
Unbilled Revenue Journal Entry
Unbilled revenue will be recorded as revenue in the income statement. The accountants may separate it into different accounts which easy to control and reverse back when invoices are issued.
On the other side, the company uses unbilled receivables which present as current assets in the balance sheet. This balance will be reclassed to accounts receivable when the invoices are issued.
At the end of the month, company will make a journal entry by debiting unbilled receivable and credit unbilled revenue.
Unbilled receivable is classified as a current asset in balance sheet, some companies may record it in accounts receivable’s subaccount.
When the accountant issues invoices, they need to reclass unbilled receivable to accounts receivable by making the following journal entry.
Both unbilled receivable and accounts receivable are very similar, but we need to use accounts receivable as it allows us to attach customer names, invoice numbers which is very helpful to monitor cash collection.
Unbilled Revenue Journal Entry Example
Company ABC provides cleaning service to the customers. The company will provide service to customers after receiving orders. After cleaning, the worker will seek customers’ signatures to use as evidence attached with the invoice. After that accountants will use supporting document such as purchase orders and work completion reports to prepare invoices.
On 30 Apr, accountants request the work completion report from the worker and a summary of finished work. The company has completed the work of $ 5,000 but not yet issued invoice.
On 05 May, accountants issue invoices for all the completed work in the reports.
On 30 Apr, as the work already completed they need to record revenue to make sure it meets the matching principle. The company records revenue into the income statement by using unbilled revenue.
The company makes journal entry by debiting unbilled receivable and credit unbilled revenue $ 5,000.
On 05 May, when the company issue invoice to customer, so we need to reclass unbilled receivable to accounts receivable. It will help them to control the individual invoice.
They need to debit accounts receivable and credit unbilled receivable.
It will not impact the unbilled revenue as it is already recorded in April’s income statement. Unbilled receivables will be eliminated from the balance sheet. And the accounts receivable will be recorded and controlled as normal.
Unbilled Revenue vs Deferred Revenue
Deferred revenue is the amount of cash that customers paid to company before goods or services are delivered. The company needs to debit cash and credit liability which is the balance that owes to the customers. It is opposite from unbilled revenue which we provide goods or services but not yet bill invoices.
Deferred revenue will be reclassed to revenue when a company provides service or goods to the customers. The balance will be moved from balance sheet to income statement to reflect the work completed.