Those businesses working on an accrual method of accounting, i.e. not just on a cash basis, need to account for certain end-of-period adjustments (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 essential part of this end-of-period reporting and what we will be looking at in this article.
The quick solution to treating this entry is to debit an asset account called Unbilled Revenue (a current asset) and raise a 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 income but is yet to bill/invoice the customer.
Unbilled revenue shouldn’t be confused with credit sales. A credit sale is when an invoice has been sent to the customer, but payment is not received. These entries would usually be 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 a client under a contract, which sets out the work we were to do and the payment due. This agreement enables us to recognise this as an asset. And thus recognise the revenue owing.
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.
Balance Day Adjustment
The client has now signed off on the work, but ABC’s sales team has yet to invoice. So at month-end, the accounting team, in preparing the month-end management report, would create the following journal entry:
| Date | Account Name | Debit | Credit |
|---|---|---|---|
| 31 May | Unbilled Revenue | $30,000 | |
| | Sales | | $30,000 |
The debit entry increases ABC’s current asset balance, while the credit entry increases its revenue.
Reversal of Balance Day Adjustment
The following entry can be confusing when dealing with balance day adjustments, but it is essential. These adjustments are reversed at the opening of the next period to keep the accounting system as neat as possible. 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 you would typically make the following entry:
| Date | Account Name | Debit | Credit |
|---|---|---|---|
| 1 June | Sales | $30,000 | |
| | Unbilled Revenue | | $30,000 |
Invoice Issued to Customer
And then when the sales team issues the invoice, let’s say on June 3rd, you would make the following entry in ABC’s accounting system:
| Date | Account Name | Debit | Credit |
|---|---|---|---|
| 3 June | Debtors | $30,000 | |
| | Unbilled Revenue | | $30,000 |
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.
Debtor Pays
And for completeness, when the customer pays the invoice issued, the following entry would be recognised by ABC:
| Date | Account Name | Debit | Credit |
|---|---|---|---|
| 25 June | Bank | $30,000 | |
| | Debtors | | $30,000 |
Conclusion
We trust this short article has helped you understand unbilled revenue, why we recognise it as a current asset and the journal entries involved in bringing it to account.