Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

3. Accrual Accounting Concepts

Adjusting Entries: Accrued Revenues

Accrued Revenues occur when we have delivered a good or service to the customer, but have not yet been paid by the customer.


Adjusting Journal Entries: Accrued Revenues

Play a video:
Was this helpful?
Alright now let's talk about accrued revenues. I think this one's a little silly because it's just basically a credit sale. But let's talk about it since your book wants to talk about it. Alright, so crude revenues. These are adjusting entries as well. Right? And we've been talking about deferrals Krul's and depreciation. Well, guess what? This is in a cruel as well. Accrued revenues accrued expenses. Those are our Krul's. Okay. So crude revenues. This is revenue earned before cash is received. Right? So this is where we give our product to the customer but they haven't paid us for it yet. Right. So accounts receivable, we've talked about this before accounts receivable. What is it? Is it an expense liability asset or revenue? Well the key word here receivable tells us that this is something the company is gonna receive. That's a good thing. This is an asset. Okay, accounts receivable. This is money owed to the company by customers. So customers have bought our product and haven't paid us yet. They have an account receivable uh and we will collect that money eventually. Cool, so let's talk about the adjusting entries here. So the first entry we make is on the revenue recognition date. Okay, so remember we recognize revenue when it's earned the date the company performed its end of the bargain and this is that revenue recognition principle. Okay, so when we perform our end of the bargain regardless of when the cash happens, we recognize revenue on April 25. The company sold $500 worth of goods to a customer on account. Okay. Remember this on account that tells us that they didn't pay us yet that means that they were going to pay us at a future date But we sold that that $500 worth of goods. We did our end of the bargain right? We gave it to the customer. They now have the goods, we did our part of the bargain. So we earned the revenue. But instead of getting cash, what did we receive? We received an account receivable accounts receivable, right? Which is also called a are we usually put it like that? I wrote it out this time but I'm generally gonna just put a ar for accounts receivable, Right? So we're going to debit accounts receivable for 500 right? To increase the balance of that asset, we are owed $500. So we need to have an asset for that money that's owed to us. And we're gonna credit revenue right? Because we earned this revenue right now. So we're gonna increase our revenue by 500. Cool. Alright. So that's pretty basic. That's just a credit sale. I'm sure you've seen one like that before. Okay. And now the adjusting date is is when we received the cash, right? So the customer is gonna pay their debt to the company and the account receivable is removed from the books right? When we received the cash, that's it, we no longer have that I. O. U. And we have the cash instead. So let's think of two different possibilities. Let's say that on june 12th, the company received $500 from the customer. Great. That's the amount they owe us. Right? $500. So what are we gonna do? Well we received $500. So we're gonna debit cash for $500. And we're going to credit accounts receivable for $500, right? This lowers the balance and accounts receivable and this money is no longer owed to us, right? Because we got paid in full. So accounts receivable has a zero balance, right? We got paid in full. Now what if the customer had paid us only $300 while we would still make a very similar entry, right? We still received cash. Now it's only $300. And accounts receivable is gonna go down, right? We have to credit accounts receivable for $300 because that's no longer owed to us either. All right, let me get out of the way. Um so in this case we didn't get the full payment from the customer right? They owed us 500 and they only paid us 300. So they still owe us 200. So if we were to look on our balance sheet there would still be a balance in accounts receivable uh for the for those $200 that's still owed to us. Right? We were still taking all the revenue. Now it's a completely different topic altogether that we'll get into later in this class of whether we're ever going to receive that money, right? What's gonna happen if we don't receive that other $200? Well, that's not the question now, right? We'll talk about that in a later video, but for now, this is what you want to know. You want to see that we're gonna take that revenue when we earn it, and then we're gonna receive the cash and lower the iOU in accounts receivable. Cool. Alright. Let's go ahead and pause here and move on to the next video.

On December 23, a customer placed an order with Timely, Inc. On December 28, Timely, Inc. delivered the product to the customer. Timely’s accountant forgot to make the entry and made the entry on January 3. The customer paid its account in full on January 7. When should Timely, Inc. record the revenue?