Accrued Revenue

Question: Accrued revenue is the third general type of adjustment to be covered here. Based on the title, this

revenue is one that grows gradually over time. If not recorded by a company’s accounting system, updating is

necessary before financial statements are prepared. What adjustment is used to recognize accrued revenue that

has not previously been recorded?

Answer: Various types of revenue are earned as time passes rather than through a physical event such as the sale of

inventory. To illustrate, assume that a customer comes to the Lawndale Company five days before the end of the

year and asks for assistance. The customer must be away for the next thirty days and wants company employees

to feed, water, and care for his horses during the period of absence. Everything needed for the job is available at

the customer’s farm; Lawndale just has to provide the service. The parties agree that the company will receive

$100 per day for this work with payment to be made upon the person’s return.

No asset changes hands at the start of this task. Thus, the company’s accounting system is not likely to make any

entry until payment is eventually received. However, assume that after the first five days of work, the company

is ready to prepare financial statements and needs to recognize all revenue earned to date. The service to this

customer has been carried out for five days at a rate of $100 per day. The company has performed the work to earn

$500, an amount that will not be received until later. This receivable and revenue should be recognized through

an adjusting entry so that the reported financial figures are fairly presented. The earning process for the $500

occurred this year and should be recorded in this year.