Corporate accountants keep track of myriad types of revenue that flow through companies, most of which bear enigmatic or even misleading names. Accrued revenue and unearned revenue, two types of accounts on company financial statements, count amongst these many revenue streams. Stark contrasts exist between these types of capital – enough so that in a very basic way accrued revenue constitutes the opposite of unearned revenue, also known as deferred revenue.
Bookkeeping methods of revenue recognition principles for each differ greatly as well. Fortunately, corporate CPAs can refer to the Generally Accepted Accounting Principles (GAAP) that cover the methods to record both types of revenue under accrual accounting, explains the University of Nebraska-Lincoln.
Basics of Accrued Revenue
According to the University of San Francisco, accrued revenue is revenue not yet received during a fiscal or accounting period for services already rendered. It usually assumes the form of interest or future payments due on items sold on credit or installment plans.
For instance, assume your company provides a loan valued at $10,000 in December with a repayment date the following March and a total of $2,000 in interest revenue. The recipient of the loan pays you the full value of the loan in March, including interest. While you received payment for the interest fees for December, January, February and March all at once, this $2,000 payment actually consists of four $500 installments of accrued income.
Another example of accrued revenue occurs when one company has a long-term contract with a client to provide goods and services. Suppose ABC Construction has an agreement to renovate 120 apartments for Acme Real Estate Holdings over the coming year. Per the agreement, ABC will renovate 10 apartments per month and will bill Acme at the end of each quarter. Based on this arrangement, ABC will accrue the revenue monthly on its income statement for every 10 apartments it renovates but will only send an invoice, which creates an accounts receivable, to Acme four times per year.
How Unearned Revenue Works
Unearned revenue is revenue received for services not yet rendered. It assumes a variety of forms, from rent paid in advance to contracts made before the delivery of services.
For instance, assume ABC company rents office space and pays its landlord $50,000 in December for rent covering the period of January through May. This constitutes unearned income for the landlord until January, at which point the rendering of services begins.
The same holds true for contracts. If you receive $100,000 upfront in November for a contract beginning the following January, this constitutes unearned revenue until the period of the contract begins. Upon the commencement of services, unearned income begins converting to earned revenue and concludes doing so upon the conclusion of a contract term.
Accrued Revenue vs. Unearned Revenue
Accrued revenue and unearned revenue are opposite concepts in a fundamental way. While accrued revenue is money not received on services already provided, unearned revenue is money already received on services not yet provided. The nature of unearned revenue proves relatively obvious given the name – capital not yet earned through services.
The nature of accrued revenue proves less immediately evident. The term gains its name from the fact that as a company accrues capital from services previously rendered, it officially records them.
How to Record Accrued Revenue vs. Deferred Revenue
When a company sells goods or services with the promise of interest income or future payments, the University of California explains it uses the accrual accounting method, not the cash accounting basis method, to record the value of services sold on the income statement as a debit to accounts receivable as a current asset in the company ledger.
As a company accrues payment for services rendered, accountants make adjusting journal entries to the general ledger by moving portions of the debited income to the revenue account of a ledger. When a company receives unearned income, it notes the entire amount as a liability, or payable, on its balance sheet. Upon providing services for unearned income, it moves the liability to the earned income area of a ledger.
Accountants also rely on the matching principle concept of financial accounting to accurately record revenue and expenses. The goal is to match accrued expenses with accrued revenues in the accounting period to present realistic income statements that are not affected by the timing of cash flows and when cash payments are received.
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