Unbilled Revenue Journal Entry
Unbilled revenue is the amount that a company earns after goods or services are delivered 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.
| Account | Debit | Credit |
|---|---|---|
| Unbilled Receivable | 000 | |
| Unbilled Revenue | 000 |
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.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 000 | |
| Unbilled Receivable | 000 |
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.
Solution
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.
| Account | Debit | Credit |
|---|---|---|
| Unbilled Receivable | 5,000 | |
| 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.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 5,000 | |
| Unbilled Receivable | 5,000 |
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.
Why do we need to record unbilled revenue?
In business transactions, revenue rarely aligns perfectly with invoicing schedules. Unbilled revenue bridges this gap, capturing income earned but not yet issued invoices. Recording this essential element underpins accrual accounting’s commitment to faithfully representing a company’s financial position.
1. Accurate Revenue Recognition: The essence of accrual accounting lies in recognizing revenue when earned, regardless of cash collection. Delivery of goods or services creates a right to receive payment, establishing an accrued receivable and obligating revenue recognition. Ignoring unbilled revenue would lead to an understatement of current period income, misrepresenting the company’s profitability and financial health.
2. Matching Principle: Accrual accounting thrives on aligning expenses with the revenue they generate. Recording unbilled revenue allows for the proper matching of costs incurred to deliver these goods or services with the resulting income. This adherence to the matching principle paints a more accurate picture of the company’s operational efficiency and profitability.
3. Enhanced Financial Statement Accuracy and Transparency: Complete financial statements necessitate capturing all potential sources of future cash inflows. Unbilled revenue represents a significant portion of this future cash flow, its exclusion distorting the statements’ accuracy and undermining their usefulness for internal decision-making and external stakeholder assessment.
To ensure accurate financial reporting, unbilled revenue is typically recorded through a debit to the Unbilled Receivable account and a credit to the unbilled revenue account. This entry recognizes the accrued receivable and the corresponding increase in income. As work progresses or invoices are issued, adjustments are made to the Unbilled Revenue account to reflect the reduction in future earnings potential.
The Challenge in Recording Unbilled Revenue
Accurately accounting for unbilled revenue presents a unique set of challenges for organizations embracing accrual accounting principles. These challenges can impact the efficiency, accuracy, and ultimately, the reliability of financial reporting.
1. Tracking Goods or Service Deliver: Unbilled revenue often arises from ongoing projects or service contracts, where goods or services are delivered incrementally. Maintaining meticulous records of these partial deliveries, their progress, and associated invoicing schedules is crucial. The absence of a complete picture at any given time can lead to potential misstatements of future earnings.
2. Partial Revenue Recognition: When invoices are issued for ongoing projects, a portion of the previously recognized unbilled revenue needs to be reversed and replaced with the amount invoiced. This partial recognition process requires careful calculations and accurate record-keeping to avoid double-counting or under-reporting of revenue.
3. Administrative Burden: Managing unbilled revenue adds another layer of complexity to the accounting process, increasing the workload for finance personnel. Maintaining detailed records, reconciling partial deliveries with invoicing schedules, and ensuring proper adjustments can be time-consuming and resource-intensive.
4. Internal Control Concerns: The lack of formal invoices associated with unbilled revenue can pose internal control risks. Without robust procedures and oversight, there’s a higher chance of overstating or understating revenue due to errors, omissions, or even fraud. This can significantly impact the financial statements’ reliability and transparency.
Internal Control Over Unbilled Revenue
Unbilled revenue presents a unique challenge for internal control frameworks. Its dynamic nature and potential impact on financial statements necessitate robust procedures to ensure its accuracy and integrity. Here, we explore four key control measures for effective management of unbilled revenue:
1. Implementing Effective Tracking Systems:
Invest in robust project management and accounting software designed to track ongoing projects, deliveries, and their associated revenue recognition schedules. This software can automate progress monitoring, generate real-time updates, and provide valuable insights into future earnings potential. Additionally, implementing automated data capture from operational systems can further streamline tracking and minimize manual data entry errors.
2. Establishing Clear Revenue Recognition Policies:
Develop and document clear and concise revenue recognition policies tailored to a specific business model and industry. These policies should define the criteria for recognizing unbilled revenue, the methodologies for determining the degree of completion, and the procedures for allocating portions to invoices issued. Consistency in applying these policies will ensure reliable and accurate financial reporting.
3. Automating Workflows:
Leveraging technology to automate repetitive tasks associated with unbilled revenue management can significantly enhance efficiency and reduce the risk of errors. Tools for automating journal entries, adjustments, and reconciliations can free up staff time for higher-value activities while minimizing the potential for human error in data manipulation.
4. Strengthening Internal Controls:
Implement strong internal controls specifically designed for unbilled revenue, including:
- Regular reconciliations: Comparing unbilled revenue records with supporting documentation and project updates to ensure accuracy and completeness.
- Review procedures: Establishing a system for independent review of unbilled revenue calculations and journal entries by qualified personnel.
- Segregation of duties: Separating the tasks of recording, authorizing, and reconciling unbilled revenue to minimize the risk of fraud and manipulation.
- Access controls: Restricting access to unbilled revenue records and systems to authorized personnel only.
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.