Accrued revenue and accounts receivable are different financial statement items, despite being closely related in journal entry recording. While accrued revenue is reported in the income statement, accounts receivable is recorded as an asset on the balance sheet. Thus, companies can add accrued revenue to their net income at the time of a credit sale, even though they have yet to collect cash from accounts receivable. Future cash collection reduces accounts receivable but doesn’t affect accrued revenue. However, any uncollected accounts receivable affect both the realized accrued revenue and the net value of accounts receivable.
Accrued revenue is the revenue that a company has earned by delivering products or providing services but has not received in cash from customers. Accrued revenue as earned must also be realizable based on company expectation of successful cash collections in the future. Absent an estimate of any doubtful accounts, companies credit the total accrued revenue to the revenue account and report it in the income statement. In effect, companies may recognize accrued revenue, independent of cash collection on related accounts receivable.
Accounts receivable are a kind of current asset that companies expect to convert to cash in the near future. The balance of particular accounts receivable is the same as the amount of related accrued revenue, but accounts receivable generate cash flows when collected rather than revenue. In a credit sale, companies debit accounts receivable to increase the balance of accounts receivable in the balance sheet, as opposed to debiting cash for a cash sale. For companies that use the cash basis of accounting, a credit sale and its resulting accounts receivable are not considered as having generated any revenue.
When companies have successfully collected cash on accounts receivable from previous credit sales, they debit the amount of cash collected and credit accounts receivable to reduce the balance in the accounts receivable accordingly. Cash collection on accounts receivable doesn’t increase revenue for companies that use the accrual basis of accounting. With cash collected, companies can simply remove accounts receivable from the balance sheet and convert them to cash .
When companies fail to collect cash on certain accounts receivable, they incur the so-called bad debt expense. The recording of a bad debt expense reduces net income in the income statement and the net asset value of accounts receivable on the balance sheet. When to record a bad debt expense depends on the accounting method used for uncollectible accounts receivable. Companies may either estimate the amount of potentially uncollectible accounts receivable at the time of a credit sale or write off any uncollectible accounts when they become actually uncollectible at a future time. As a result, the recorded bad debt expense either lowers accrued revenue and total accounts receivable immediately following a sale or reduces future income and any outstanding accounts receivable in a later period.
- alzay/iStock/Getty Images