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What Is Unbilled Revenue And How To Account For It
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Unbilled revenue represents the value for which the work is done but has yet to be billed. Such revenue is a critical part of the revenue system, even though it hasn’t reached your account.
According to a US Bank Study, 82% of businesses tend to fail because of poor cash flow management, which includes invoicing hassles.
In this article, you’ll understand everything about uninvoiced revenue and its importance.
What is Unbilled Revenue
Unbilled revenue occurs when a company earns money but hasn’t invoiced the customer.
For example, a construction company completes part of a project, but the client bills at the end. The earnings from the completed part, not yet received, are unbilled revenue.
This is also called accrued, pending, or work-in-progress revenue. Most companies encounter unbilled receivables, an asset account representing provided products/services not yet billed.
Unbilled revenue, also known as outstanding revenue, can arise from advance services, one-time projects, add-on purchases, invoice delays, or contractual projects.
GAAP (Generally Accepted Accounting Principles) includes accrued revenue in accrual accounting. It is identified when a performance obligation is satisfactorily met by the performing party.
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How To Account For Unbilled Revenue
To account for unbilled revenue, follow these steps:
Identify Earned Revenue
Determine services or goods provided but not yet invoiced.
Record as an Asset
In your balance sheet, list unbilled revenue as a current asset.
Comply with IFRS Standards
In the case of UAE, adhere to International Financial Reporting Standards (IFRS), specifically IFRS 15, which governs revenue recognition. Otherwise, adhere to the accounting standards of the specific place.
Update Regularly
Consistently track and update your outstanding revenue to reflect accurate financial statements.
Invoice Timely
Ensure invoices are issued promptly to convert unbilled revenue into accounts receivable.
By following these steps, businesses in the UAE can ensure accurate financial reporting and maintain compliance with local accounting practices.
How does Unbilled Revenue Occur
Accrued revenue occurs when services are delivered but the bills have not been invoiced. It occurs in the following cases:
- Service completion before invoicing: Let’s say a marketing agency completes a month-long campaign with a client but the invoice is sent towards the end of the next month.
- Long-term contracts: Revenue is recognized over time for long-term contracts even though payment is received periodically.
- Work-in-progress: Under this revenue is accrued for the work which is partially complete but not yet billed.
- Subscription services: When services are provided to the subscribers even before the payment is received.
- Goods delivered on credit: Revenue is accrued on goods being delivered to the customers on credit terms.
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How to Recognize Unbilled Revenue?
To effectively recognize unbilled revenue, follow these steps:
- Regularly update financial statements to reflect outstanding revenue accurately.
- Monitor accounts to ensure timely billing of this revenue.
- Record journal entries: Debit unbilled revenue and credit the corresponding revenue account.
- Estimate revenue based on project milestones and historical data if exact amounts are unknown.
- Regularly review completed work to identify the outstanding revenue.
- Maintain detailed records of completed work and provided services.
- Follow accrual accounting principles to recognize revenue when earned, regardless of cash receipt.
Recommended Read: The Definitive Guide Financial Modeling – Meaning, Types, Future
Importance of Tracking Unbilled Revenue
Here’s why tracking this is vital for businesses:
- Anticipates Future Cash Inflows: Monitoring accrued revenue improves cash flow management and planning.
- Ensures Accurate Financial Reporting: Proper tracking identifies earned income and aligns with accounting principles.
- Removes Errors and Discrepancies: Ensures proper invoicing of goods/services.
- Mitigates Revenue Leakage: Identifying accrued revenue reduces the risk of missed opportunities.
- Boosts Investor Confidence: Transparent tracking provides a comprehensive view of financial health.
- Informs Strategic Decisions: Offers insights into business trends and customer behavior, aiding resource allocation and growth strategies.
- Ensures Regulatory Compliance: Timely invoicing reduces audit risks and financial penalties.
Unbilled Revenue vs Deferred Revenue
The table below displays the key differences between unbilled and deferred revenue:
| Aspect | Deferred Revenue | Unbilled Revenue |
| Definition | Advance payment received for the goods to be delivered or the services to be rendered | Income earned but not yet received because it has not been billed |
| Where does it appear in the financial statement? | Liability on the balance sheet | Asset on the balance sheet |
| Accounting treatment | Recorded as a liability until the goods or services are delivered | Recorded as revenue when earned even if not invoiced |
| Revenue recognition | Recognized as revenue over time | Recognized when earned as per the revenue recognition principle |
| Impact on cash flow | Immediate cash flow | No immediate cash inflow |
| Timing | Occurs before services are rendered | Occurs after services are rendered but before invoicing |
| Example | When OTT platform receives annual subscription fees upfront | When a consultancy completes the project but hasn’t billed the client yet |
How to Minimize Unbilled Revenue
By implementing the following strategies, companies can minimize their accrued revenue and improve cash flow:
Continuous billing cycles
Design and implement a process of regular billing cycles, monthly or weekly to make sure that all completed work is invoiced within the specified time frame.
Timely invoices
Send proper invoices promptly after the work is done.
Automated billing system
Utilize automation in your billing systems to streamline the invoicing process and reduce the risk of missed invoices.
Clear payment terms and rules
Communicate the payment terms upfront to avoid any miscommunication and minimize delays.
Track and monitor
Regularly track and monitor outstanding invoices or any overdue payments to follow a timely payment process.
Streamlined approval processes
Simplify and streamline the invoice approval process for a straightforward billing process.
Train and educate the staff
Make sure that your staff is well-trained and aware of the unbilled revenue meaning and its importance.
With the above-given steps, you can minimize accrued revenue quickly without any hassle.
Conclusion
Unbilled revenue is a key asset for businesses. Proper accounting ensures compliance with local regulations and boosts financial transparency.
Tracking unbilled revenue enhances cash flow management and minimizes risks. Master this concept to drive growth and secure investor confidence.
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