How to record an accrued revenue journal entry

Many businesses rely on accrued revenue entries, especially in industries like consulting, SaaS, and professional services, where work is completed before invoices are sent. Service-based businesses contribute a significant amount to the U.S. GDP, highlighting the widespread need for accurate revenue recognition.

What is accrued revenue?

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Unlike cash-based accounting, which only records revenue when money is received, accrual accounting follows the revenue recognition principle. This principle, enforced by GAAP (Generally Accepted Accounting Principles), helps you provide a clearer picture of your company’s financial health. Larger companies must use the accrual accounting method if their average gross receipts exceed $25 million over the past three years.

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Accrued revenue is common in industries with delayed billing cycles. For example, SaaS companies often charge customers at the end of a billing period, and construction firms complete project phases before invoicing.

How does accrued revenue impact financial statements?

Without accrued revenue, financial statements can misrepresent a company’s performance, leading to incorrect valuations, tax miscalculations, and compliance risks.

Balance sheet

Accrued revenue appears as a current asset on the balance sheet under accounts receivable or accrued income. This represents money the company has earned but has not yet received.

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For example, a consulting firm that completes a project in December but doesn’t invoice the client until January still needs to record that income in December. If the firm overlooks accrued revenue, its balance sheet will underestimate assets, giving the impression that the company is financially weaker than it actually is.

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Accrued revenue ensures the balance sheet reflects all earned income, offering a more accurate view of a company’s liquidity and financial position. Investors, lenders, and stakeholders rely on this information to assess whether a company has enough account receivables to support its short-term obligations.

Income statement

The income statement records revenue when it is earned, not when cash is received. This aligns with GAAP’s revenue recognition principle, which requires businesses to match revenue to the period in which services or goods were provided.

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For example, a SaaS company providing annual software subscriptions records a portion of revenue each month, even if the customer hasn’t paid yet. If accrued revenue isn't recorded, the income statement will understate earnings, giving a misleading picture of financial performance.

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This is especially important for businesses seeking funding. Investors and lenders assess revenue trends to determine profitability and growth potential. If a company underreports income due to missing accrued revenue entries, it could struggle to secure loans or attract investment.

Cash flow statement

Since accrued revenue represents earned income that hasn’t been collected in cash, it does not initially affect the cash flow statement. The company reports the revenue on the income statement and balance sheet, but cash flow remains unchanged until the payment is received.

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Once the company invoices the customer and collects payment, the cash flow statement posts the cash inflow to operating activities. Businesses need to track accrued expenses carefully to avoid cash flow mismatches, ensuring they have enough liquid funds to cover expenses while waiting for payments.

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For instance, if a marketing agency books $50,000 in accrued revenue in December but collects the payment in March, the revenue is recorded in December, but cash flow doesn’t increase until March. Poor tracking of these entries can lead to short-term cash shortages, affecting payroll, supplier payments, and operational expenses.

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Using automation tools like Ramp’s real-time data syncing can help businesses avoid these issues. Ramp connects directly with accounting platforms like QuickBooks, NetSuite, and Sage, automatically updating all accrued revenue transactions as payments are received. This allows finance teams to monitor cash flow changes in real-time, reducing the risk of unexpected shortages and improving financial planning.

Step-by-step process for recording accrued revenue

Accrued revenue is recorded at the end of an accounting period, typically monthly, quarterly, or annually, depending on a company's reporting cycle. Businesses using accrual bookkeeping must ensure all earned revenue is properly recognized before closing their books. This is especially important for companies with long billing cycles or delayed payments, such as consulting firms, SaaS providers, and professional service businesses.

• Step 1: Identify earned but unpaid revenue
  The first step is determining if the business has earned revenue it has not yet received. This applies when a business has provided goods or services but has not yet invoiced the customer. You need to recognize revenue when it is earned, even if you haven’t received the cash.
• Step 2: Create an accrued revenue journal entry
  Once you identify accrued revenue, you must record it in the accounting system. This involves debiting an asset account and crediting a revenue account to reflect earned income. This entry records revenue in the correct period, even though the payment has not yet been collected.
• Step 3: Adjust entries when payment is received
  Once payment is received, the accrued revenue account is reduced, and the cash account is increased. This journal entry removes the accrued revenue from the books and reflects the actual cash inflow. This ensures that the revenue is not counted twice and that financial records remain accurate.
• Step 4: Review and reconcile accrued revenue accounts
  Accrued revenue accounts should be reviewed regularly, at least at the end of each accounting period, to ensure that outstanding amounts are collected and recorded correctly. Unchecked discrepancies can lead to overstated revenue or accounting errors.

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Many financial reporting errors stem from revenue recognition mistakes. Regular reconciliation helps businesses maintain compliance, avoid costly misstatements, and ensure financial statements accurately reflect their earnings.

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Accrued revenue vs. deferred revenue

Accrued revenue and deferred revenue are two sides of revenue recognition in accrual accounting.

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Deferred revenue occurs when a company receives payment for a product or service it has yet to provide. Since the company still owes the customer something, it is recorded as a liability on the balance sheet under unearned revenue. As the company delivers the service or product over time, it gradually moves the deferred revenue to a revenue account in the income statement.

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For instance, a SaaS company that collects an annual subscription fee upfront must defer the revenue and recognize only a portion each month as services are delivered. If deferred revenue isn’t recorded correctly, financial statements may overstate earnings, creating misleading financial reports.

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Accrued revenue, however, is recorded when a company has earned revenue but has not yet received payment. This ensures financial statements reflect income as it is earned rather than when cash is collected. It is recorded as an asset on the balance sheet because the business expects to receive payment in the future.

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For example, if a consulting firm completes a project in December but invoices the client in January, the revenue is still recognized in December as accrued revenue. Without this entry, earnings would be understated, misrepresenting the company’s financial position.

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The key difference between the two lies in timing. Accrued revenue reflects money that is earned but unpaid, while deferred revenue represents money that is received but not yet earned. Businesses that fail to properly classify these entries risk financial misstatements, tax errors, and compliance issues.

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Ramp’s custom accounting rules and dynamic field mapping allow businesses to automate expense categorization and streamline accounting processes, ensuring accurate reporting and reducing the risk of misstatements.

Common scenarios where accrued revenue occurs

Accrued revenue is common in industries where businesses provide goods or services before receiving payment. Recognizing this revenue ensures financial statements accurately reflect earnings.

Service-based businesses

Service companies often perform work before invoicing clients, making accrued revenue a standard part of their accounting. Businesses in sectors like marketing, legal services, and healthcare frequently complete services that are billed at a later date.

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For example, a law firm may work on a case for months and only bill the client after reaching a specific milestone. If the company does not recognize that work as accrued revenue, it will understate earnings on its financial statements, which can impact its financial health. These companies risk cash flow mismatches without proper recognition, making budgeting and financial planning more difficult.

Subscription-based businesses

Companies offering subscription-based services, such as SaaS providers, streaming platforms, and membership-based businesses, often generate accrued revenue. Many of these businesses charge customers at the end of a billing period rather than upfront, meaning they have earned revenue before payment.

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For example, a software company offering monthly invoicing recognizes accrued revenue throughout the month as users access the platform, even though the invoice is only sent at the end of the billing cycle. Without accruing this revenue, the company’s income would appear inconsistent, failing to reflect actual earnings.

Consulting and freelance work

Consultants and freelancers often complete projects before receiving payment, leading to accrued revenue entries. Whether it’s a management consultant advising a company or a freelance designer delivering creative work, earnings must be recorded in the period they are earned, even if the client hasn’t paid yet.

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For instance, a business consultant providing strategy services over three months will accrue revenue as work is completed, even if the final invoice is due at the project’s completion. Failing to record these earnings could lead to underreported income, making it difficult to track financial performance. Over 59 million Americans work as freelancers, with many relying on accurate accrual accounting to manage irregular payment cycles.

Adjusting entries for accrued revenue: Practical example

Accrued revenue entries ensure that financial statements accurately reflect income that has been earned but not yet received. These adjustments are recorded at the end of an accounting period to align revenue with its earned period, keeping financial reports compliant with GAAP and IFRS standards.

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For example, a software development company that completes a custom application for a client on December 20. The total project fee is $30,000, but the client won’t be invoiced until January 10. Since the service was delivered in December, the revenue must be recorded in that month. The adjusting journal entry on December 31 would be:This ensures that the revenue is reflected in the correct period, even though payment hasn’t been collected.

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The accrued revenue entry remains unchanged when the company invoices the client on January 10. However, once the payment is received on January 20, the company records the following adjustment:

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This removes the accrued revenue from the books and replaces it with cash, ensuring accurate financial reporting.

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Many businesses struggle with misclassification, delayed adjustments, and reconciliation errors when recording accrued revenue. These issues can lead to inconsistent financial statements and compliance risks if revenue is recorded incorrectly across multiple periods. Manually adjusting entries for hundreds or thousands of transactions can also slow down the financial close process, increasing the risk of errors.

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Ramp simplifies this process by using AI-suggested accounting rules to standardize revenue recognition adjustments. By analyzing transaction patterns, Ramp helps finance teams apply consistent categorization across periods, reducing manual work and the likelihood of misstatements. This automation ensures that accrued revenue entries stay accurate, helping businesses streamline their financial close cycle and maintain compliance with accounting standards.

Why does accurate accrual accounting matter for businesses?

Accrual accounting shapes how businesses plan, grow, and make decisions. Recording revenue when earned, not just when cash arrives, gives a clearer picture of financial health and ensures compliance with GAAP and IFRS standards. Without it, businesses risk misstating income, underreporting profits, and making financial decisions based on incomplete data.

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For companies looking to expand, accurate revenue tracking is critical. Investors, lenders, and stakeholders rely on financial statements to assess profitability and stability. Around 60% of investors prioritize revenue recognition when evaluating a company’s financial position. Businesses that misreport revenue don’t just face compliance risks. They also lose credibility, which can cost them funding and future opportunities.

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Beyond compliance, accrual accounting also helps businesses plan ahead. Recognizing revenue in the right period leads to better forecasting, smarter budgeting, and stronger cash flow management.

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Managing accrual accounting manually can be complex, especially for businesses dealing with high transaction volumes. Errors in transaction coding, inconsistent revenue adjustments, and delayed reconciliations can slow down financial close cycles.

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Automating this process with tools like Ramp can help finance teams reduce manual data entry, standardize revenue categorization, and sync transactions in real-time. Ramp’s AI-powered transaction coding and automated adjustments ensure businesses maintain compliance while closing their books faster and more accurately.