Accrued Revenue Explained: Why It's a Game-Changer for Your SaaS Business

Accrued Revenue vs Deferred Revenue vs Unearned Revenue

Each type of revenue is a fundamental concept in the world of finance, serving a unique purpose and function:

Accrued Revenue:

• Represents revenue that has been earned but not yet received.
• Typically involves services or products already delivered.
• Recorded as an asset on the balance sheet.
• Reflects income that will be realized soon.

Deferred Revenue:

• Represents payments received in advance for services or products to be provided in the short-time future.
• Recorded as a liability on the balance sheet.
• Reflects income that will be recognized in the future as services are delivered.

Unearned Revenue:

• Really similar to deferred revenue
• Represents payments received in advance for services or products to be provided in the long-time future (often spanning beyond one year).
• Recorded as a liability on the balance sheet.
• Reflects income that will be recognized in the future as services are delivered.

In essence, accrued revenue is about recognizing income that is due to you but not yet received, and deferred revenue (or unearned) is about acknowledging an obligation to deliver services or products in the future. 

⭐ Bonus: And What About Earned Revenue?

• And also, we have earned revenue - the revenue that has been both recognized and received.

Examples of Accrued Revenue

Let's explore a couple of accrued revenue examples to illustrate accrued revenue in practical terms:

#1 Advertising Services

Advertising agencies may bill clients for advertising campaigns at the beginning of the month, but the contract and performance of the work often refer to the previous month. Accrued revenue helps agencies recognize the income for services rendered even before clients pay their bills. As soon as accrued revenue is realized, it is shown as revenue on the income statement.

#2 Consulting Services:

Imagine you run a consulting firm that offers project-based services. You complete a project for a client in January, but the client pays you in February. In this case, you have done the work in January, and the pay becomes accrued revenue also in January. Thus, it’s recorded as such until you receive payment in February.

#3 Web Hosting

Web hosting companies provide hosting services continuously, often billing customers on a monthly or yearly basis. Accrued revenue helps them recognize the income for the services they provide before customers are billed.

Understand Accrued Revenue with Valueships

At Valueships, we specialize in helping SaaS companies navigate complex pricing and financial metrics and concepts like accrued revenue. 

Our team of experts provides guidance on using accrued revenue, including financial analytics, research, and strategic decision-making. We will also empower you to make informed choices that drive your business forward.

So, don't hesitate and record the revenue and profit as it should be done. 

Conclusion

Accrued revenue is revenue earned from providing a good or service but not paid yet. Chances are, you've come into contact with this revenue and don't know how to handle it. 

Well, after reading this article, things should change for the better. 

If you still have doubts about this revenue, want to know more about how accrued revenue is recognized, or how accrued revenue may affect your business, contact us.

We will help you understand accrued revenue transactions.

FAQ Section

1. What is accrued revenue, and how is it recorded in the financial statements?

Accrued revenue, also known as accrued income, represents revenue that has been earned but not yet received in cash or recorded by the company. This situation typically occurs when a company provides goods or services at the end of an accounting period but has not yet invoiced the customer. Accrued revenue is recorded as an asset on the balance sheet under accounts receivable, indicating the company's right to receive this income. Simultaneously, it is recognized on the income statement in the same accounting period in which the revenue was earned, adhering to the accrual accounting principle of matching revenues with expenses in the period they occur, regardless of when cash transactions happen.

2. How does deferred revenue differ from accrued revenue, and what impact does it have on a company's financial statements?

Deferred revenue, also known as unearned revenue, is the opposite of accrued revenue. It occurs when a company receives payment for goods or services before they have been delivered or performed. Deferred revenue is recorded as a liability on the balance sheet because it represents an obligation to deliver products or services in the future. As the company fulfills its obligation to provide the goods or services, the deferred revenue is recognized as earned revenue on the income statement over time, reflecting the revenue recognition principle. This process decreases the liability on the balance sheet and increases revenue on the income statement, impacting both the company's financial position and its profitability.

3. What are the key principles of revenue recognition that affect the recording of accrued and deferred revenue?

The key principles of revenue recognition that affect the recording of accrued and deferred revenue are based on the accrual accounting concept, which dictates that revenue should be recognized when it is earned, regardless of when the cash is received. The main criteria include:

• Revenue is recognized when a company has substantially completed the earnings process or delivered the goods or services.
• There must be a reasonable certainty that the revenue will be collected.These principles ensure that financial statements accurately reflect a company's financial performance and position. For accrued revenue, this means recognizing revenue as soon as the service is performed or the product is delivered. For deferred revenue, it involves recognizing revenue only when the obligation to the customer has been fulfilled.

4. How does the management of accrued revenue accounts and deferred revenue accounts affect a company's cash flow?

The management of accrued revenue accounts and deferred revenue accounts affects a company's cash flow in different ways. Accrued revenue may not immediately impact cash flow since it represents revenue earned but not yet received; however, it indicates potential future cash inflows when the customers pay their invoices. On the other hand, deferred revenue directly impacts cash flow at the time of payment receipt, as it represents cash received in advance of delivering goods or services. While this boosts cash flow initially, the company has an obligation to perform, which does not result in additional cash inflow until new sales are made. Proper management of these accounts is crucial for accurate cash flow forecasting and ensuring the company has sufficient liquidity to meet its obligations.

5. Why is it important for businesses to accurately record accrued and deferred revenue in accordance with accrual accounting principles?

Accurately recording accrued and deferred revenue in accordance with accrual accounting principles is important for several reasons:

• It ensures financial statements provide a true and fair view of the company's financial performance and position, reflecting revenues and expenses in the period they are earned or incurred, not just when cash changes hands.
• Accurate recording helps in compliance with accounting standards and regulations, reducing the risk of financial misstatements that could lead to legal or regulatory consequences.
• It aids in better financial planning and analysis by providing management and stakeholders with a clear understanding of the company's revenue streams and obligations, supporting more informed decision-making.
• Accurate accrual accounting practices contribute to maintaining the trust of investors, creditors, and other stakeholders by demonstrating prudent financial management and reliability of financial reporting.

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