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When a company sells goods, it must record them as sales. For the companies that offer credit to customers, these also become a part of the accounts receivable balances. Sometimes, however, they may also appear as accrued revenues, which can create confusion. Fundamentally, both are the same due to their type.
However, accounts receivable and accrued revenues may include some minor differences. Before discussing those, it is crucial to study both individually.
What are Accounts Receivable?
Accounts receivable is an account in the balance sheet that includes all balances owed to a company by its customers. These balances come from previous credit sales transactions for which a settlement has not occurred. However, any transaction in the accounts receivable account must have an invoice sent to the customer. Usually, accounts receivable appear under current assets in the balance sheet.
Companies record accounts receivable under the requirements of the accruals concept in accounting. It requires companies to recognize expenses and income when they occur rather than when the settlement happens. Consequently, companies must record assets and liabilities that correspond to those elements. Accounts receivable represents an asset recognized due to credit sales.
What are Accrued Revenues?
Accrued revenues are an account in the balance sheet to include sales for which a company has not sent an invoice. This account is relevant in the Generally Accepted Accounting Principles (GAAP), where companies must record sales when they occur. Under the International Financial Reporting Standards (IFRS), the invoice acts as the supporting document for a transaction.
Accrued revenues act as a transition account to accounts receivable. When a company makes a sale, it records in the former account. As it sends the invoice to the customer, it moves that balance to the accounts receivable account. The later a company sends the invoice, the more time the amount stays in the accrued revenues account.
What are the similarities between Accounts Receivable and Accrued Revenues?
Accounts receivable and accrued revenues are similar in many ways. They are a part of the same process occurring when a company makes a credit sale. As mentioned above, the accrued revenues account is relevant if a company takes time to send an invoice to the customer. The longer that time is, the more the amount will stay in the accrued revenues account.
Once the company sends the invoice, it can transfer the sale amount to the accounts receivable account. Companies can also use both terms interchangeably. Similarly, both accounts are fundamentally the same. Sometimes, companies may not use the accrued revenues account at all. However, companies functioning under GAAP must do so by requirement.
What are the differences between Accounts Receivable and Accrued revenues?
There is no significant fundamental difference between accounts receivable and accrued revenues. The primary one is the timing of when they occur in the sales process. Usually, a sale enters the accrued revenues account first and stays there for some time. As stated above, this time is determined by how long it takes to issue an invoice to the customer.
Another difference between accrued revenues and accounts receivable is the cash aspect. Companies do not receive payment for credit sales before issuing an invoice. Therefore, the accrued revenues account does not include any cash transactions. These only get recorded in the accounts receivable balance. While both accounts may appear in the balance sheet, some companies accumulate both under accounts receivable.
Accounts receivable and accrued revenues are a part of the credit sales process. These accounts record a sale at different points in the cycle. Usually, companies use the accrued revenues account for sale transactions for which they have not issued an invoice. The amount gets transferred to accounts receivable after the invoice date. Both accounts record the same sale.
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