What is Accrued Revenue?
Accrued revenue is an accounting term that refers to money a person or organization is owed through products delivered or services rendered that have not yet been paid for. This type of revenue can be earned by performing services or providing a product for delayed payment, which is usually billed to the recipient. It is a temporary debt to the business that has provided the product or service. Accrued revenue figures are most often used when trying to get a loan, and can help raise the value of a business that has made sales that have not been paid for.
Keeping track of accrued revenue is most important in service-industry businesses that often supply products or services before payment is received. It can also come into play if the business finances its product or service sales. One example of this might be an auto shop that allows customers to engage in payment plans for services rendered in the shop. In this case, financed payment that has not yet been received by a business that finances its own sales would be considered accrued revenue. A musician who has made royalties or commissioned pieces that have not yet been paid out also deals with accrued revenue.
Allowing customers to receive products or services and pay for them later can help increase sales by enticing customers who want to get a product or service but may not have the cash on hand. It can also help businesses that deal with large service contracts by allowing the customer to pay for the service gradually. One disadvantage to allowing this type of arrangement is that the business has incurred the cost of the service before it receives money for the service, which can put a business in something of a temporary financial hole until the debt is paid.
Accrued revenue is a vital part of determining the value of a business for the purpose of acquiring loans and raising capital. When a business is operating successfully but does not have enough liquid capital to keep the business moving forward, it can often seek loans based on the value of the accrued revenue owed to the business by its customers. Without figuring owed revenue, a business with thriving sales appears to have considerably less value and may find it difficult to get loans or additional financing.
Though this type of revenue has some applications in personal finance, it usually only applies to large businesses that are seeking financing. An example of this type of revenue for a worker would be the money owed to him for hours he has worked on a paycheck that has not been delivered yet. In the life of a working earner, if a worker gets a paycheck every two weeks, time he has worked that will be paid for on a future paycheck is accrued revenue until payment is received by the worker.
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