The terms “accrued revenue” and “accounts receivable” relate to an accounting procedure called “revenue recognition.” Businesses need to keep track of their assets and liabilities at all times. If a snapshot of a company’s financials are taken at a particular moment, all the bits of paper moving around its accounts department need to be recognised as either an asset or a liability. Revenue recognition is part of this categorization process and focuses on unrealized income.
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Roughly speaking, “revenue” is another way of saying “income.” It can also be called “sales” or “turnover.” Revenue does not equate to cash, as some income may be paid in other ways, such as an exchange of goods or an earned discount. However income is generated, if it was earned by a business, it is classed as revenue.
Pass the parcel
Think of revenue recognition as a game of pass the parcel. A business produces goods or delivers services for which income is earned. Many products flow through companies and eventually turn into cash on their balance sheets. However, some goods or services never actually produce physical cash, while others may bring in cash eventually – sales on credit fit into this category. These should still be regarded as assets on a company's balance sheet. Revenue should be recorded at the moment it is earned, not on the day payment arrives.
"Receivables” are an amount earned by a seller but not yet paid by a customer. Businesses have invoices to show for this debt which record receivables as assets. Invoices document any amounts owed and can be logged against a customer’s account.
Once a business delivers goods or services, there is usually a delay before it produces an invoice, and then another delay before payment is received. Revenue recognition allows businesses to record income at the time earnings are generated, even before an invoice has been raised.
If a month end passes before the company generates the invoice for a delivery, the value of the sale is logged as accrued revenue for that month. If the invoice exists, but the customer has not yet paid, the value of the sale is logged as accounts receivable. Both accrued revenue and accounts receivable are assets and increase the value of the business.
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