Revenue is its basic form is very simple. A business transaction, either through a product or a service, leads to the business receiving revenue, such as a cash, check (or electronic versions) or a payment based on credit. However, for some industries, the transaction and the revenue do not always line up. These leads to a delay between completion of activities and payment for them, which is one reason larger businesses must use the accrual accounting method. There are several common examples of accrued revenue throughout many industries.
In the financial services industry, payment is typically based on a particular action, such as creating an account, transferring funds, notarizing a document or offering advice. It is very common for some fees to be billed to clients after the services have been completed, so there is a delay between the service and the payment that leads to accrued revenue. For major clients, expenses may only be charged each week or month.
The financial services industry is not alone in its tendency toward accrued revenue. Many service industries also end up using the accrued method of payment. This occurs when a service is rendered, but not necessarily charged until later. For example, if a landscaping company performed work on a lawn for half a month, the company may delay the charge, accruing it until the client can be billed for a full month of work instead.
Delayed Product Payment
Sometimes product payment is also delayed. Although not as common as accrued service revenue, product revenue might be put on hold for some clients. Suppliers may ship their supplies to manufacturers but wait until the end of the month to send an invoice. Individuals may also arrange for delayed payment, but this is more rare than accrued revenue from another organization.
At other times, delayed revenue is simply caused by the time it takes to process a payment. Clearing a check can take a few days, and during this time period the revenue is considered earned but accrued until the cash is received. This becomes important at the end of the month, when checks that have not yet cleared are counted as accrued revenue on financial statements.