earnedaccrual

Earned accrual is a term used in accounting to describe the recognition of amounts in financial records when they are earned or incurred, rather than when cash is received or paid. While it conveys a clear idea in plain language, it is not a standardized term in most accounting manuals. Professionals typically use the more precise phrases accrued revenue and accrued expenses. In revenue terms, earned revenue occurs when a good or service has been delivered and performance obligations are satisfied, even if billing or cash receipt occurs later. The opposite situation, unearned or deferred revenue, arises when cash is received before the revenue is earned.

Examples help illustrate the concept. If a company provides a service in December but invoices the client in January, accrual accounting recognizes the revenue in December by recording a receivable and revenue. Conversely, if employees earn wages in December that are paid in January, the company records an expense in December and creates an accrued liability to reflect the obligation to pay.

Accounting treatment and journal entries. Accrued revenue requires recognizing a receivable and revenue in the period earned (for example, Debit Accounts Receivable, Credit Revenue). Accrued expenses require recognizing an expense and a corresponding liability (for example, Debit Expense, Credit Accrued Liabilities). Adjusting entries at period end ensure the financial statements reflect economic activity in the correct period. Estimates may be involved, and such accruals can affect profit, asset and liability balances, and key financial ratios.

Relation to standards and limitations. Earned accrual aligns with the principles of accrual accounting and the revenue recognition framework in GAAP and IFRS, though the exact term is informal. Limitations include reliance on estimates and potential for misstatements if timing or amounts are uncertain.

See also: accrual basis accounting, accrued revenue, accrued expenses, deferrals, revenue recognition.