Accrued Revenue vs Accounts Receivable - Definition, Examples
Accrued Revenue vs Accounts Receivable
So, first of all we have to understand meaning of both the terms i.e. accrued revenue and accounts receivable. The precise but clear definition of both these terms are given as under:
What is Accrued Revenue in Accounting?
Accrued Revenue is the income of a company which it earned but not billed and received. Accrued income arises when a company sale and deliver goods or services to customers but bill for receiving payment for that goods or services are not delivered to them. Since order of customer for delivery of goods or services are completed but bills for the same has not been given, it will be listed as accrued revenue in the books of accounts. The accrued revenue will be recorded as current assets in balance sheet.
For example, a company sale and deliver goods or services to its customers for Rs. 5 lakhs but bill for that transaction are not raised/delivered to customer then this amount Rs. 5 lakhs will be considered as accrued revenue and when bill for this transaction is delivered this amount will be recorded in accounts receivable. When this amount is received both entries accrued revenue and accounts receivable will be considered as working capital of the company. Another example for accrued income is that:
For example, suppose ABC Co. delivers it's services worth Rs 10,000 in December 2023 on the terms of receiving payment in January of following year (2024). In this case revenue of the company Rs. 10,000 become due in January 2024 but bill for that amount is not raised and delivered till following year i.e. January 2024 then in December 2023 this amount of Rs. 10,000 will be recorded as accrued revenue in accounts of ABC Co. and when they will receive this amount, it will be recorded as working capital.
Note, only the amount of goods sold or service rendered will be treated as accrued revenue if bill for that is not delivered to customer and when bill is delivered this amount will not more be treated as accrued revenue.
What is Accounts Receivable Mean?
The team accounts receivable means goods sold or services rendered by a company to it's customers on credit basis and bill for the same is delivered to them. This amount of credit sale is know as accounts receivable and recorded in balance sheet as current assets. The total of all goods or services rendered during the year but still not paid for are listed in assets side of balance sheet as current assets and when the amount of any credit transaction is received it is deducted from current assets and recorded in accounts as working capital.
The sale of goods or render services on credit basis are very common in business and depends on demand and supply. When supply is more, more credit and vice-versa. From industrial revolution and formation of new companies there are huge production of goods and services so there are large quantity of goods are available in market for sale. Therefore most of the goods are sold on credit basis, the prevalent practice is about 30 to 60 days credit.
Therefore this credit sale is called accounts receivable. The credit transaction is recorded as current assets because it is short term by nature and will probably be encash in about credit limit time i.e. 30 to 60 days or during the year. After it's liquidation it will be converted into liquid working capital and used for further business activities.
In some cases major part of working capital is turning into accounts receivable hence the production of goods and services becomes very difficult. To overcome this situation companies generally offer discount to debtors for speedy recovery of accounts receivable to arrange required working capital for production of goods and services and save the company from probable loss of revenue.
For example - if ABC Co sales goods to A Bros worth Rs 50000 on 60 days credit. In this transaction this sale amount of Rs 50,000 is accounts receivable and will be recorded as current assets in balance sheet because it is expected to be liquidated after expiry of 60 days.
For example - if the working capital of ABC Co is 20,00,000 and company sales goods or render services worth Rs 15,00,000 on credit (accounts receivable) and this company required about 10,00,000 as working capital for production of goods and services. So this company is in deficit of working capital amounting to Rs 5, 00,000. In this case ABC Co can liquid accounts receivable by offering cash discount and liquid accounts receivable fast to perform their business activities smoothly.
The journal entry of credit sale, accounts receivable, of 50,000 to A Bros will be as under:
A Bros. Dr. 50,000
To Goods. 50,000
Being goods sold to A Bros Rs 50,000 on credit.
When ABC Co liquid the above amount journal entry will be:
Cash/Bank A/c Dr. 50,000
To A Bros. 50,000
Being cash/bank received for credit sale of goods to A Bros Rs 50,000
So, accounting standards provide the scientific accounting method for every type of entry which are accepted by almost all companies involved in similar types of activities like manufacturing companies, commercial organisation, non-profit organization, charitable organisation etc.
How Accrued Revenue Differ from Accounts Receivable?
As per accounting standards Accounts receivable are bills which the company has issued to their customers but it's amount has not been received yet whereas accrued revenue means the income earned by the company but invoice has not been delivered.
Thus main difference between accounts receivable and accrued revenue is that the total amount of goods sold but payment for that has not been received and in later case (accrued revenue) only the amount of income for which bill has not been delivered is listed as accrued revenue in the books of accounts.
In case of accounts receivable whole amount of goods sold or services rendered but payment has not been received yet is called accounts receivable whereas only the part of income of the company out of total sale of goods or services is called accrued revenue provided invoice for that sale is not issued.
Conclusion
Accrued revenue of the company is recognised when the company earned income by selling goods or rendering services whereas accounts receivable of the company is recognised when it sale goods or services and deliver invoice. So accrued revenue is the income earned by the company and accounts receivable listed in accounts when invoice has been delivered.
Both accounts receivable and accrued revenue are recorded as assets in balance sheet but both are recorded seperately in the books of accounts of the company. Accrued revenue is the income of the company and recognised immediately when earned and on the other hand accounts receivable will be recognised only when bills are delivered to customers.