Those businesses working on an accrual method of accounting, ie not just on a cash basis, need to account for certain end-of period adjustments (often referred to as balance day adjustments). This could be for the year-end external reporting or even month-end reporting to management. The recognition of unbilled revenue, or often called accrued revenue, is an important part of this end-of-period reporting and what we will be looking at in this article.
The quick solution to how to treat this entry is to debit an asset account called Unbilled Revenue (its a current asset) and raise credit against the applicable revenue account. For a more detailed explanation … please read on.
Definition of Unbilled Revenue
As we mentioned above, the accrual method of accounting requires us to look at the flow of economic benefits rather than just when cash moves. In our case with unbilled revenue we are dealing with a transaction where a business has carried out the work and earned the revenue, but is yet to bill/invoice the customer.
This is not to be confused with credit sales. These are earnings that have been invoiced to the customer but payment has yet to be received. These entries would normally be made through the sales journal.
The reason why unbilled revenue is an asset as it meets the definition of one under the conceptual frameworks. Under the International Financial Reporting Standards (IFRS) Conceptual Framework an asset is an event that creates obligations on a third party to provide us with economic benefits we can control.
In our case we have done some work for client under a contract, which sets out what is to be done and the payment to be made, which enables us to recognise this as an asset to us. And thus recognise the revenue due.
Unbilled Revenue Example and Journal Entries
Working through an example is a good way of gaining a better understanding of this balance day adjustment. ABC Limited undertakes small building projects around town and has just finished a shop fit-out for a local cafe. The contract set out the specifications and timeframe and ABC would be due $30,000 at the satisfactory end of the job.
The client has now signed-off on the work, but ABC’s sales team has yet to issue the invoice. So at month-end the accounting team, in preparing the month-end management report, would create the following journal entry:
|31 May||Unbilled Revenue||$30,000|||
The debit entry increases ABC’s current asset balance, while the credit entry increases its revenue.
The next entry can be a little confusing when dealing with balance day adjustments; but it is important. To keep the accounting system as neat as possible these adjustments are reversed out at the opening of the next period. This is similar in that the adjustments made don’t have to be remembered later on, as they are only made for reporting purposes at that time.
So the following entry would normally be made:
And then when sales team issues the invoice, lets say on June 3rd, the following entry would be made in ABC’s accounting system:
The debit to debtors increases ABC’s current assets, while the credit to unbilled revenue decreases current assets (and so the accounting equation is still in balance). Yes, in effect the amount owed is just reclassified within the current assets section of the balance sheet.
And for completeness, when the customer pays the invoice issued the following entry would be recognised by ABC:
We trust this short article has helped in your understanding of unbilled revenue, why it is recognised as a current asset and the journal entries involved in bringing it to account.