Accrued Revenue vs Unearned Revenue: US GAAP Guide + Examples
Accrued Revenue vs Unearned (Deferred) Revenue Under US GAAP
Revenue recognition is one of the most critical areas in financial reporting. Misstating accrued revenue or unearned (deferred) revenue can distort profitability, mislead stakeholders, and trigger audit or compliance risks. Under US GAAP, revenue recognition is primarily governed by ASC 606 – Revenue from Contracts with Customer.
Understanding the difference between accrued revenue and unearned revenue ensures financial statements present a true and fair view.
What is Accrued Revenue?
Accrued revenue is revenue that a company has earned by fulfilling its performance obligation, but has not yet billed the customer or received payment for. It arises under accrual accounting when revenue recognition precedes invoicing or cash collection.
Under U.S. GAAP, particularly ASC 606 – Revenue from Contracts with Customers, revenue is recognized when control of goods or services transfers to the customer—not when cash is received. If billing happens later, the earned amount is recorded as a Contract Asset (commonly referred to as accrued revenue).
In simple terms, accrued revenue reflects work already performed or services already delivered for which payment will be received in the future.
Why Accrued Revenue Exists
Accrued revenue typically arises in situations where:
• Services are provided before invoicing
• Revenue is earned over time (percentage-of-completion contracts)
• Usage-based billing occurs after service delivery
• Milestones are achieved but billing is scheduled later
• Subscription services are delivered before periodic invoicing
Without recording accrued revenue, income would be understated and financial statements would not reflect the true economic activity of the period.
It is recorded as an asset (often called “Contract Asset” under ASC 606).
Practical Examples of Accrued Revenue
Example 1: Consulting Services Delivered but Not Billed
A consulting firm completes $20,000 worth of services in December but invoices the client in January.
Journal Entry (December):
Dr Contract Asset (Accrued Revenue) 20,000
Cr Service Revenue 20,000
When invoice is issued in January:
Dr Accounts Receivable 20,000
Cr Contract Asset 20,000
Example 2: Construction Milestone Revenue
A contractor completes 40% of a $100,000 project by year-end but has only billed $30,000.
Revenue earned = $40,000
Already billed = $30,000
Accrued revenue = $10,000
Journal Entry:
Dr Contract Asset 10,000
Cr Construction Revenue 10,000
Example 3: SaaS Usage-Based Billing
A SaaS company provides usage services in March worth $8,000 but bills customers in April.
Journal Entry:
Dr Contract Asset 8,000
Cr Subscription Revenue 8,000
Here is a more comprehensive and practical version of your case study, aligned with US GAAP and ASC 606 principles:
Case Study: Accrued Revenue under ASC 606
Background
A digital marketing agency signs a 6-month performance marketing contract with a retail client starting October 1. The total contract value is $120,000, payable in milestones. Services are provided evenly over the 6 months ($20,000 per month).
By December 31 (end of Q4), the agency has fully delivered 3 months of services (Oct–Dec), meaning it has earned $60,000 in revenue for Q4.
However, as per the billing terms:
• October invoice: $30,000 (billed and collected)
• December invoice: $30,000 (covers Nov + Dec, but raised on January 5)
So, by December 31:
• Total revenue earned: $60,000
• Total revenue billed: $30,000
• Revenue not yet billed: $30,000
This $30,000 represents accrued revenue (Contract Asset).
Accounting Issue Without Adjustment
If no adjusting entry is passed on December 31:
• Revenue will be recorded only for $30,000 (billed amount)
• Earned but unbilled revenue of $30,000 will be ignored
• Net income will be understated by $30,000
• Assets will be understated because the right to consideration exists
• Financial statements will not comply with the matching principle
• ASC 606 performance obligation satisfied but revenue not fully recognized
Correct Accounting Treatment (Year-End Adjustment)
Since the performance obligation for Nov and Dec has been satisfied, revenue must be recognized even if billing happens later.
Adjusting Journal Entry on December 31:
Dr Contract Asset (Accrued Revenue) 30,000
Cr Revenue 30,000
Financial Statement Impact After Adjustment
Income Statement:
Revenue increases by $30,000
Net income increases accordingly
Balance Sheet:
Contract Asset increases by $30,000
Equity increases via retained earnings
What Happens in January (When Invoice is Raised)?
On January 5, the agency raises invoice for $30,000 (Nov + Dec). At this point:
Dr Accounts Receivable 30,000
Cr Contract Asset 30,000
Explanation:
• $30,000 already recognized in December (accrued portion) which we needs to reversed
Practical Interpretation under ASC 606:
Under ASC 606, revenue is recognized when:
- Performance obligation is satisfied
- Control of service transfers to customer
- Revenue can be measured reliably
In this case:
• Services were delivered in Nov and Dec
• The agency has an enforceable right to payment
• Therefore, revenue must be recognized
This creates a Contract Asset (not Accounts Receivable), because billing has not yet occurred.
Why It Matters (Real-World Impact)
- Accurate Profit Reporting
Management sees true quarterly profitability. - Better KPI Tracking
Revenue growth, gross margin, and EBITDA reflect actual performance. - Investor & Lender Confidence
Prevents artificial revenue fluctuation between periods. - Compliance Risk Avoidance
Failure to record accrued revenue may lead to audit qualification under ASC 606.
Key Takeaway
Accrued revenue ensures that financial statements reflect economic reality — not just billing activity. Under ASC 606, performance drives revenue recognition, not invoice timing.
What is Unearned (Deferred) Revenue?
Unearned Revenue (also called Deferred Revenue) is the amount received from customers before goods or services are delivered. Since the company has not yet satisfied its performance obligation, the amount cannot be recognized as revenue. Instead, it is recorded as a liability until the obligation is fulfilled.
Under ASC 606, revenue is recognized when control of goods or services transfers to the customer. If cash is received before this transfer happens, the company records a Contract Liability (Deferred Revenue).
In simple terms, unearned revenue represents an obligation to either provide goods/services in the future or refund the customer.
Why It Is a Liability
It appears under Current Liabilities (or Non-Current Liabilities if service extends beyond 12 months) because:
• The company owes goods or services
• Revenue has not yet been earned
• Performance obligation is still pending
• There is potential refund risk if services are not delivered
It is not income at the time of receipt because no economic performance has occurred.
Under ASC 606, it is called a “Contract Liability.”
Practical Examples of Unearned Revenue
Example 1: Annual Software Subscription Paid Upfront
Customer pays $12,000 on Jan 1 for 12 months service.
On Receipt:
Dr Cash 12,000
Cr Deferred Revenue 12,000
Monthly Recognition (Jan end):
Dr Deferred Revenue 1,000
Cr Subscription Revenue 1,000
Example 2: Advance Rent
Tenant pays $24,000 in advance for 6 months.
On Receipt:
Dr Cash 24,000
Cr Unearned Rent Revenue 24,000
Monthly Entry:
Dr Unearned Rent Revenue 4,000
Cr Rent Revenue 4,000
Example 3: Training Program Fees
A training institute collects $50,000 in December for courses starting in January.
On Receipt:
Dr Cash 50,000
Cr Deferred Revenue 50,000
When course delivered:
Dr Deferred Revenue
Cr Training Revenue
Case Study: Unearned (Deferred) Revenue under ASC 606
An IT services firm enters into a 10-month managed services contract starting April 1. The total contract value is $200,000 for cloud monitoring, cybersecurity support, and system maintenance. As per agreement, the client pays the full $200,000 upfront on April 1.
The services are to be provided evenly over 10 months (April–January).
Step 1: Cash Receipt (April 1)
At contract inception, cash is received but no service has yet been delivered.
Journal Entry:
Dr Cash 200,000
Cr Deferred Revenue (Contract Liability) 200,000
Financial Impact at This Stage:
• Cash increases by 200,000
• Liability increases by 200,000
• No impact on revenue or profit
• Performance obligation still pending
This reflects that the company now owes 10 months of services.
What Happens If Company Incorrectly Records Revenue Immediately?
If management records:
Dr Cash 200,000
Cr Revenue 200,000
Then:
• Revenue overstated by 200,000
• Profit overstated significantly
• Liability understated (zero instead of 200,000)
• EBITDA artificially inflated
• Working capital distorted
• Non-compliance with ASC 606
This could result in audit qualification and financial restatement.
Correct Revenue Recognition Approach
Under ASC 606, revenue must be recognized as performance obligations are satisfied. Since services are delivered evenly, revenue per month:
200,000 ÷ 10 months = 20,000 per month
Monthly Adjusting Entry (April End):
Dr Deferred Revenue 20,000
Cr Revenue 20,000
This entry will be passed every month for 10 months.
Financial Statement Movement Over Time
After Month 1 (April 30):
Income Statement → Revenue = 20,000
Balance Sheet → Deferred Revenue = 180,000
After Month 5 (August 31):
Revenue recognized = 100,000
Deferred Revenue remaining = 100,000
After Month 10 (January 31):
Revenue recognized = 200,000
Deferred Revenue = 0
By the end of the contract, the liability is fully extinguished.
Advanced Practical Scenario: Partial Performance
Assume services were disrupted in Month 3 and only 75% of services were delivered.
Revenue for Month 3 should be:
20,000 × 75% = 15,000
Not the full 20,000.
This demonstrates that revenue recognition depends on actual performance, not time alone.
Balance Sheet Classification
If reporting date is June 30:
Remaining service period = 7 months
Deferred revenue remaining = 140,000
Entire amount will generally be classified as Current Liability (since to be earned within 12 months).
If contract was 24 months instead, portion beyond 12 months would be classified as Non-Current Liability.
Why This Matters Practically
- Prevents Earnings Manipulation
Upfront revenue booking artificially boosts quarterly results. - Accurate KPI Reporting
Revenue growth and margins reflect real service delivery. - Investor & Banker Confidence
Deferred revenue indicates future revenue pipeline. - Compliance with ASC 606
Revenue recognized only when performance obligation satisfied. - Cash Flow vs Revenue Clarity
Cash inflow ≠ Revenue recognition.
Accrued Revenue Errors Can:
• Understate income
• Distort margins
• Mislead investors
• Affect loan covenants
Unearned Revenue Errors Can:
• Inflate profits artificially
• Create audit red flags
• Cause SEC scrutiny (for public companies)
• Trigger tax timing mismatches
Proper recording ensures:
• Matching principle compliance
• Accurate EBITDA
• True working capital position
• Reliable financial ratios
• Clean audit trail
Key Takeaway
Unearned (Deferred) Revenue represents an obligation to deliver services in the future. Under ASC 606, revenue must be recognized systematically as performance obligations are satisfied — not when cash is received. Proper monthly allocation ensures compliance, transparency, and accurate financial reporting.
US GAAP Reference Framework
Under ASC 606, revenue is recognized when performance obligation is satisfied. Key principles include:
- Identify contract
- Identify performance obligations
- Determine transaction price
- Allocate transaction price
- Recognize revenue when obligation is satisfied
Accrued revenue relates to satisfied but unbilled obligations.
Unearned revenue relates to unsatisfied but prepaid obligations.
Checklist to Ensure Correct Recording of accrued revenue and unearned revenue
For Accrued Revenue:
• Verify performance obligation completed
• Confirm measurable revenue amount
• Match with contract terms
• Review billing cut-off
• Reconcile contract assets monthly
For Unearned Revenue:
• Review advance payments
• Match revenue to service delivery schedule
• Reconcile deferred revenue rollforward
• Maintain contract liability aging
• Review revenue recognition schedule monthly
Frequently Asked Questions (FAQs) for accrued revenue and unearned income
Can accrued revenue be recorded without a signed contract?
Only if persuasive evidence of arrangement exists and revenue is measurable and collectible under ASC 606 guidelines.
Is deferred revenue taxable immediately?
Tax treatment may differ from book treatment. For accrual-basis taxpayers, deferred revenue shall not be taxable but cash basis it will be fully taxable.
How does accrued revenue differ from accounts receivable?
Accrued revenue is earned but not yet invoiced. Accounts receivable is invoiced to customer but unpaid.
What happens if performance obligation is partially satisfied?
Revenue is recognized proportionally based on progress measurement method (output or input method).
How do modifications affect deferred revenue?
Contract modifications require reassessment under ASC 606 — either treated as separate contract or cumulative catch-up adjustment.
How does incorrect recording affect valuation?
Overstated revenue inflates EBITDA and valuation multiples, leading to misleading investor decisions and can destroy organizations wealth.
Final Thought
Accrued and unearned revenue are not merely routine accounting adjustments—they are fundamental to the credibility of financial reporting. The timing of revenue recognition directly affects reported profitability, balance sheet strength, working capital analysis, debt covenants, tax exposure, and ultimately business valuation. Even a small misstatement can materially distort EBITDA, net income trends, and key performance ratios that investors, lenders, and management rely upon for decision-making.
Under ASC 606, revenue recognition is driven by performance obligations—not billing cycles or cash receipts. Accrued revenue ensures that income earned but not yet invoiced is properly reflected, while unearned revenue prevents premature recognition when cash is received in advance. Together, they align financial reporting with economic substance rather than transactional timing.
When these items are recorded correctly, financial statements present a true and fair view of the company’s financial position. Earnings become sustainable and comparable across periods, balance sheets accurately reflect assets and obligations, and audit or regulatory risks are significantly reduced. Most importantly, consistent and compliant revenue recognition builds investor confidence, strengthens stakeholder trust, and supports long-term enterprise value.