When we talk about money and accounting, two crucial concepts appear before us that can determine the fate of any organization or person in the business world. They are: accrued expenses and accrued revenue. If you are looking for a deep understanding of these two modern concepts, you have come to the right place. When we talk about accrued expenses, we refer to the expenses that the organization or individual must bear based on the obligations, services, or goods that they have purchased. Simply put, they are the costs that the company or individual must pay in the future based on current operations. As for accrued revenue, it is the amount expected or owed to the company or individual based on the services provided or programmed sales. It is also the expected return that the organization or person can earn in the future based on current operations.
The difference between accrued expenses and accrued revenue
What is an accrued expense?
It is a term that refers to the expenses that a company or institution must pay in accordance with the financial obligations incurred during a certain period of time. These expenses are recorded in financial audit reports and are calculated based on the concept of an economic claim, which stipulates that the expense is incurred at the time the financial obligation arises. This expense includes a variety of items, including:
Salaries and wages: This includes amounts to be paid to employees under employment contracts and outstanding wage obligations.
Cost of consumables: includes the costs of materials used in production processes or services, which must be paid for.
Energy and electricity costs: This includes the amounts that must be paid to energy and electricity companies for the consumption that occurred during the specified period.
Wages of employees who have not yet received their salaries.
Other unreimbursed expenses: These items include expenses that have not yet been paid, such as debts owed to suppliers or taxes owed.
Example
If there are accrued expenses from an establishment at the end of the fiscal year 12/31/2022 amounting to 30,000 Saudi riyals and the value of the expense was paid in 2023
Accounting entries
Recording the accrued expenses on 12/31/2022.
- 30,000 from/expense.
- 30,000 to accrued expenses.
Recording the closing of the due expense upon payment in 2022
- 30,000 from accrued expenses.
- 30,000 to the company treasury.
What is accrued revenue?
It is a term that refers to the returns that a company or organization must calculate and record in its financial reports, based on the concept of economic verification. Accrued revenue is calculated when it is achieved economically. Thus, the company must be able to collect the cash owed reasonably well.
Accrued revenue includes several components, including:
Sales revenue
When a company sells its products or services to customers, accrued revenue is the amount due for these sales. Once sales are achieved and payments are received, these revenues are recorded in the accounting records.
Revenues derived from services provided
In addition to sales revenues, accrued revenues can include revenues derived from services provided. For example, if a company provides consulting services to a client and it is agreed to pay a certain amount based on the services provided, then this amount is considered accrued revenue.
Other returns
Accrued revenues may also include other revenues that have been obtained but not yet recorded. For example, if the company obtains revenues from its investments, such as interest accrued on deposits or returns from securities, then these revenues are considered accrued revenues. It must be registered in a timely manner.
Example
If the organization has accrued revenue that was not collected on 12/31/2022, its value is 30,000 Saudi riyals, and it was collected on 1/1/2023.
financial entries
Accrued revenue was recorded on 12/31/2022.
- 30000 from accrued revenue.
- 30,000 to/income.
Accrued revenue is closed upon collection in 2023.
- 30,000 from the company’s treasury.
- 30000 to accrued revenue.
Basic differences between accrued expenses and accrued revenue
Accrued expense and accrued revenue are important concepts in the financial and accounting fields, and each of them reflects different aspects of the company’s financial activities. Understanding the basic differences between them helps in analyzing and evaluating the company’s financial performance, and this can be summarized as follows:
Accrued expense
It is the amount paid or spent by the company to obtain goods or services within the framework of its business activities. The accrued expense is recorded on the credit side of the budget, which means that it affects the reduction of the company’s net income, and it can include a wide range of expenses, such as:
- Production costs.
- Salaries and wages.
- Advertising and marketing costs.
- Maintenance and repair costs.
- Due invoices.
Accrued revenue
It is the amount that the company must collect from its customers or from other sources as part of its commercial activities, and it is recorded on the debit side of the balance sheet, which means that it contributes to increasing the company’s net income. It can include revenues from sales of products or services, interest accrued on investments, and other revenues arising from the company’s activities.
What is the difference between accrued expenses and accrued revenue?
Accrued expense and accrued revenue are important concepts in accounting, but they represent different types of liabilities. Accrued expenses are expenses that a company has incurred but not yet paid, while accrued revenues are amounts owed to suppliers of goods or services received but not received. However, understanding the difference between these two terms is crucial to preparing accurate financial reports. Here they are:
- Time: Accrued expenses are recognized when incurred, while accrued revenues are recognized when goods or services are received.
- Recording: Accrued expenses are recorded as a liability on the balance sheet, while accrued revenues are recorded as a current liability.
- Payment: Expenses accrued are paid in the future, while revenues accrued are paid in the short term.
- Types of Expenses: Accrued expenses include salaries, rent, interest, and taxes, while others are usually for goods or services purchased on credit.
- Examples: An example of an accrued expense is interest on a loan that has not yet been paid.
- An example of accrued revenue is an invoice from a supplier that has not yet been paid.
The impact of accrued expenses and accrued revenue on profit and loss reports
The impact of accrued expenses and accrued revenues on profit and loss reports is an important issue in analyzing the financial performance of companies, as the accrued expense represents the expenses incurred by the company and has not yet been paid for, while the accrued revenue represents the revenues that have been achieved but are not yet recorded in the financial accounts.
Accrued expense
Starting with the accrued expense, its presence reduces the company’s net profit in the current period, as it is considered an expense that has not yet been paid. Thus, it reduces the profits available to the company in the current period.
Example
If the company has purchased goods or services and has not yet paid for them, the value of this expense will be calculated in the current profit and loss report. Therefore, the net profit for the current period will decrease.
Accrued revenue
As for accrued revenue, its presence leads to an increase in the company’s declared revenues in the current period, as it is considered revenue that has been accrued but has not yet been recorded in the financial accounts.
Example
If the company provides services to customers and has not yet received cash payments, the value of this revenue will be calculated in the current profit and loss report, and thus the company’s revenues for the current period will increase.
It should be noted that accrued expenses and accrued revenues may differ from the company’s actual cash flow in the current period because financial reports reflect financial and economic events over a specific period of time, while actual cash may be delayed in recording or paying. Therefore, analyzing the accrued expenses and accrued revenue is necessary to understand the company’s current financial performance and its future expectations.
How to use accrued expenses and accrued revenue in analyzing financial performance
Financial performance analysis is a powerful tool that helps understand and evaluate the health and sustainability of financial institutions. The accrued expense and accrued revenue can be used in this analysis to obtain a deeper insight into the company’s financial performance. Here I will review some key points about how to use these concepts in analyzing financial performance:
Financial ratio analysis
Financial ratios are among the most important tools used to evaluate the performance and health of financial institutions. Accrued expenses and accrued revenues can be used to calculate many important financial ratios, such as the debt-to-equity ratio and the profitability ratio.
Operating cash analysis
A company’s cash analysis is an essential part of analyzing financial performance. Accrued expenses and accrued revenues can be used in analyzing a company’s operating cash, as accrued revenues are compared to accrued expenses during a certain period of time. This therefore helps determine whether the company is able to carry out day-to-day business and continue to maintain its financial sustainability.
Sales trend analysis
Accrued expenses and accrued revenue can be used to analyze a company’s sales trend across multiple time periods. By comparing accrued expenses and accrued revenue across these periods, the sales trend and changes in sales volume can be determined.
Examples of accrued expenses and accrued revenue
Example of an accrued expense
The company may have incurred $5,000 in wages in the last week of the month, but payroll checks will not be issued until the following month, and the $5,000 will be recorded as an accumulated expense on the balance sheet.
Example of accrued revenue
If the company purchases inventory worth SAR 10,000 on credit from a supplier, the amount of SAR 10,000 is recorded as accounts payable on the balance sheet until the company pays the supplier.
A model of the accrued expenses and accrued revenues
If you are looking for a model to understand accrued expenses and accrued revenue, all you have to do is click here.
How to add expenses and revenues due to the Qoyod program
If you want to add the expenses and revenues due to the Qoyod program, all you have to do is follow these steps:
- Log in to the Qoyod website.
- Choose products and prices from the available selections.
- Then click on Expense among the five options available to you.
- Fill in all important fields according to your facility’s requirements, and you can leave or write additional fields.
Conclusion
The economic reality in which we live reveals to us the importance of small details that may seem trivial at first, but they carry within them an important contrast between two basic concepts: accrued expense and accrued revenue. Although they are similar on the surface, the difference between them lies in the basic point that governs income and expense operations in any organization or institution. When we talk about accrued expenses, we refer to the expenses that were actually spent within the framework of the completed operations and activities and were accrued in accordance with the organization’s obligations and requirements. As for accrued revenue, it refers to the returns that were achieved in accordance with agreed-upon agreements, contracts, and financial principles and requires careful evaluation to ensure that the accrued returns are achieved correctly and in a timely manner.
Let us always keep in mind this vital discrepancy and work to achieve a financial balance that enables us to successfully achieve our goals and ambitions, only by using an accounting program such as Qoyod, which removes the hassle of many things from you, and it is worth noting that it provides you with electronic invoice systems as well as a point-of-sale system, stores, customers, and so on.
Dear reader, After knowing the difference between accrued expense and accrued revenue, we would like to ask you a question: Were you able to choose the best accounting program? If your answer is no, try Qoyod now for free for 14 days.
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