What is an Accrued Receivable?

Accrued Receivable

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Accrued Receivable

An accrued receivable, also known as an accrued asset, is an asset that represents revenues earned by a company for goods delivered or services rendered but not yet invoiced or billed to the customers. It occurs when the revenue recognition criteria are met, but the company has not yet billed the customer, typically due to the timing of the billing cycle or the nature of the service agreement.

Accrued receivables are recorded on a company’s balance sheet as a current asset, often under “Accrued Receivables” or a similar account. They are considered a part of the accounts receivable and are expected to be converted into cash once the company issues an invoice and collects payment from the customer.

To record an accrued receivable, a company would typically record a journal entry debiting the relevant receivable account (e.g., “Accrued Receivables”) and crediting the corresponding revenue account (e.g., “Service Revenue” or “Sales Revenue”).

For example, suppose a company provided consulting services to a client during the last week of December, and the total value of the services was $5,000. The company’s billing cycle is monthly, and it will invoice the client in January. To recognize the revenue earned in December, the company would record the following journal entry:

Debit: Accrued Receivables – $5,000 Credit: Service Revenue – $5,000

This entry ensures that the company recognizes the revenue in the appropriate accounting period, adhering to the accrual basis of accounting and the revenue recognition principle.

Example of an Accrued Receivable

Let’s consider a hypothetical example to illustrate the concept of accrued receivables.

Imagine a company called “XYZ Services” that provides IT support services to clients on a monthly retainer basis. XYZ Services follows the accrual basis of accounting and has an accounting period that ends on December 31st. The company bills its clients at the end of each month for the services provided during that month.

During the last week of December, XYZ Services provided IT support services to one of its clients, “Client A,” worth $3,000. However, XYZ Services has not yet invoiced Client A for these services, as the invoice will be sent on January 1st, along with other clients’ invoices for the month of December.

To account for the accrued receivable, XYZ Services needs to recognize the revenue earned during the December accounting period, even though the invoice has not yet been issued. The company would record the following journal entry on December 31st:

Debit: Accrued Receivables – $3,000 Credit: Service Revenue – $3,000

This journal entry recognizes the revenue earned during the accounting period and records the accrued receivable as an asset on the balance sheet. Once XYZ Services issues the invoice to Client A in January and receives payment, the company will reverse the accrued receivable and record the amount as a regular accounts receivable.

By recording the accrued receivable, XYZ Services ensures that its financial statements accurately reflect its financial performance for the accounting period, providing a clearer picture of its financial health for management, investors, and other stakeholders.

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