Adjusting Entries: Accrued Revenues - Online Tutor, Practice Problems & Exam Prep

Accrued revenues represent revenue earned before cash is received, categorized as an asset under accounts receivable. When a company sells goods on account, it debits accounts receivable and credits revenue. Upon receiving cash, the company debits cash and credits accounts receivable, reducing the amount owed. If only partial payment is received, the remaining balance stays in accounts receivable. Understanding these entries is crucial for accurate financial reporting and adherence to accrual-basis accounting principles.

Adjusting Journal Entries: Accrued Revenues

Alright, now let's talk about accrued revenues. I think this one's a little silly because it's just basically a credit sale, but let's talk about it since your book wants to talk about it. Alright. So accrued revenues. These are adjusting entries as well, right? And we've been talking about deferrals, accruals, and depreciation. Well, guess what? This is an accrual as well. Accrued revenues, accrued expenses, those are accruals. Okay? So, accrued revenues. This is revenue earned before cash is received, right? So this is where we give our product to the customer, but they haven't paid us for it yet, right? So, accounts receivable, we've talked about this before. Accounts receivable, what is it? Is it an expense, liability, asset, or revenue? Well, the keyword here, receivable, tells us that this is something that we receive. That's a good thing. This is an asset, okay? Accounts receivable, this is money owed to the company by customers. So, customers have bought our product and haven't paid us yet. They have an account receivable and we will collect that money eventually. Cool? So let's talk about the adjusting entries here.

The first entry we make is on the revenue recognition date. Okay? So remember, we recognize revenue when it's earned. The date the company performed its end of the bargain, and this is that revenue recognition principle. Okay? So when we perform our end of the bargain, regardless of when the cash happens, we recognize revenue. On April 25th, the company sold $500 worth of goods to a customer on account. Okay? Remember, this 'on account' tells us that they didn't pay us yet. That means that they were going to pay us at a future date, but we sold that $500 worth of goods. We did our end of the bargain, right? We gave it to the customer, they now have the goods. We did our part of the bargain, revenue. But instead of getting cash, what did we receive? We received an account receivable. Accounts receivable, right? Which is also called AR. We usually put it like that. I wrote it out this time, but I'm generally going to just put AR for accounts receivable, right? So we're going to debit accounts receivable for $500. Right? To increase the balance of that asset. We are owed $500, so we need to have an asset for that money that's owed to us, and we're going to credit revenue, right? Because we earned this revenue right now, so we're going to increase our revenue by $500. Cool? Alright. So that's pretty basic. That's just a credit sale. I'm sure you've seen one like that before. Okay?

And now, the adjusting date is when we receive the cash, right? So the customer is going to pay their debt to the company and the account receivable is removed from the books, right? When we receive the cash, that's it. We no longer have that IOU and we have the cash instead. So let's think of two different possibilities. Let's say that on June 12th, the company received $500 from the customer. Great. That's the amount they owe us, right? $500. So what are we going to do? Well, we received $500 so we're going to debit cash for $500 and we're going to credit accounts receivable for $500, right? This lowers the balance in accounts receivable and this money is no longer owed to us, right? Because we got paid in full. So accounts receivable has a zero balance, right? We got paid in full. Now what if the customer had paid us only $300? Well, we would still make a very similar entry, right? We still received cash. Now it's only $300 and accounts receivable is going to go down, right? We have to credit accounts receivable for $300 because that's no longer owed to us either. Alright? Let me get out of the way. So in this case, we didn't get the full payment from the customer, right? They owed us $500 and then they paid us $300, so they still owe us $200. So if we were to look on our balance sheet, there would still be a balance in accounts receivable, for those $200 that's still owed to us, right? We were still taking all the revenue. Now it's a completely different topic altogether that we'll get into later in this class of whether we will ever receive that money, right? What's going to happen if we don't receive that other $200? Well, that's not the question now, right? We'll talk about that in a later video. But for now, this is what you want to know. You want to see that we're going to take that revenue when we earn it and then we're going to receive the cash and lower the IOU in accounts receivable. Cool? Alright. Let's go ahead and pause here and move on to the next video.

On December 23, a customer placed an order with Timely, Inc. On December 28, Timely, Inc. delivered the product to the customer. Timely's accountant forgot to make the entry and made the entry on January 3. The customer paid its account in full on January 7. When should Timely, Inc. record the revenue?

• A. December 23
• B. December 28
• C. January 3
• D. January 7

Here’s what students ask on this topic:

What are accrued revenues in accounting?

Accrued revenues are revenues that have been earned by providing goods or services but have not yet been received in cash. These are recorded as assets under accounts receivable. For example, if a company sells $500 worth of goods on account, it will debit accounts receivable and credit revenue. This entry recognizes the revenue earned even though the cash has not yet been received. Accrued revenues are essential for adhering to the accrual-basis accounting principles, which state that revenues should be recognized when earned, regardless of when the cash is received.

How do you record an adjusting entry for accrued revenues?

To record an adjusting entry for accrued revenues, you need to recognize the revenue earned and the corresponding receivable. For instance, if a company sells $500 worth of goods on account, the entry would be: debit accounts receivable for $500 and credit revenue for $500. This entry increases the accounts receivable (an asset) and recognizes the revenue earned. When the cash is eventually received, you will debit cash and credit accounts receivable, reducing the amount owed.

What happens if only partial payment is received for accrued revenues?

If only partial payment is received for accrued revenues, you record the cash received and reduce the accounts receivable by the same amount. For example, if a customer owes $500 but pays only $300, you would debit cash for $300 and credit accounts receivable for $300. The remaining $200 will still be recorded in accounts receivable, indicating that the customer still owes this amount. This ensures accurate financial reporting and reflects the true financial position of the company.

Why is understanding accrued revenues important for financial reporting?

Understanding accrued revenues is crucial for accurate financial reporting because it ensures that revenues are recognized when earned, not when cash is received. This adherence to the accrual-basis accounting principles provides a more accurate picture of a company's financial performance and position. It helps in matching revenues with the expenses incurred to generate them, leading to more reliable financial statements. This is essential for stakeholders, including investors and creditors, who rely on these statements to make informed decisions.

What is the difference between accrued revenues and deferred revenues?

Accrued revenues are earned but not yet received in cash, recorded as accounts receivable. Deferred revenues, on the other hand, are cash received before the revenue is earned, recorded as a liability. For example, if a company receives $500 in advance for services to be provided later, it will debit cash and credit deferred revenue. Once the service is performed, the company will debit deferred revenue and credit revenue. Understanding the difference is essential for accurate financial reporting and adherence to accrual-basis accounting principles.