#cfa-level-1 #reading-23-financial-reporting-mechanics
Unbilled revenue (or accrued revenue) arises when a company earns revenue prior to receiving cash but has not yet recognized the revenue at the end of an accounting period. In such cases, the accounting treatment involves an originating entry to record the revenue earned through the end of the accounting period and a related receivable reflecting amounts due from customers. When the company receives payment (or if goods are returned), an adjusting entry eliminates the receivable.
Accrued revenue specifically relates to end-of-period accruals; however, the concept is similar to any sale involving deferred receipt of cash. In the IAL illustration, in Transaction 9, the company sold books on account, so the revenue was recognized prior to cash receipt. The accounting treatment involved an entry to record the revenue and the associated receivable. In the future, when the company receives payment, an adjusting entry (not shown) would eliminate the receivable. In practice, it is important to understand the quality of a company’s receivables (i.e., the likelihood of collection).
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Open itIn practice, a large amount of unearned revenue may cause some concern about a company’s ability to deliver on this future commitment. Conversely, a positive aspect is that increases in unearned revenue are an indicator of future revenues. For example, a large liability on the balance sheet of an airline relates to cash received for future airline travel. Revenue will be recognized as the travel occurs, so an increase in this liability is an indicator of future increases in revenue.Original toplevel document
Open itved and the corresponding liability to deliver newsletters) and, subsequently, 12 future adjusting entries, the first one of which was illustrated as Transaction 12. Each adjusting entry reduces the liability and records revenue.
<span>In practice, a large amount of unearned revenue may cause some concern about a company’s ability to deliver on this future commitment. Conversely, a positive aspect is that increases in unearned revenue are an indicator of future revenues. For example, a large liability on the balance sheet of an airline relates to cash received for future airline travel. Revenue will be recognized as the travel occurs, so an increase in this liability is an indicator of future increases in revenue.
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