Unbilled Revenue can be defined as revenue that has been earned by the company, but it is not yet recorded on the accounts of the company. It is recognized as the revenue that has been accounted for, but relevant invoices have not yet been sent to the customers.
Unbilled revenue simply implies that there are the goods or the service has been provided to the customer, but they have not yet been billed or charged for it.
Unbilled Revenue is disclosed in the balance sheet as a Current Asset since this is an amount that needs to be received by the organization. They are categorized differently from accounts receivable because they are categorized differently.
Unbilled Revenue and Unearned Revenue
Unbilled Revenue and Unearned Revenue are common in the sense that in both these terminologies, the customer has not yet been billed. This implies that the customer has not yet been charged or billed for the good or service. However, the difference between both is the fact that in unearned revenue, the customer has prepaid in advance, and the service has not yet been performed. On the other hand, it can be seen that in the case of unbilled revenue, the good and service has been executed, but the amount has not yet been charged from the customer.
Therefore, in unbilled revenue, the customer has not yet been charged, and the service has not yet been performed (or the good has not been delivered). On the contrary, in unearned revenue, the customer has not yet been charged, and the service has not yet been performed (and the good has not yet been delivered). Regardless of the fact that the customer has paid in advance (in the case of unearned revenue), yet they have not yet been formally billed for it.
Accounting Treatment of Unbilled Revenue
Unbilled Revenue implies that the amount has been earned (i.e. the good has been delivered, and the service has been performed), but the amount has not yet been billed. Therefore, this amount needs to be collected from the customers, and therefore, it is similar to Accounts Receivables.
Accounts Receivables are Current Assets that are possessed by the company. These are the amount that needs to be collected from the customers, which have been sold goods on credit by the organization. Unbilled revenues are similar to accounts receivable since the amount is representative of collections that need to be made from customers.
However, unbilled revenue is different from accounts receivables because of the fact that unbilled revenue comprises invoices that are not yet billed but have been fully executed, whereas accounts receivables are the collectibles by the company that includes amounts that have been billed, and have also been fully serviced.
Example of Unbilled Revenue
The concept of unbilled revenue is explained in the following illustration:
Jerry Co. is a manufacturing concern that deals with bulk textile orders across the country. For the month of December 2019, they had accumulated orders equivalent to $25,000. This comprised of three orders from the main customers of Jerry Inc, the details of which are as follows:
- Jeremey Co. – goods sold worth $10,000
- Froyo Inc. – goods sold worth $7,000
- Praha Co. – goods sold worth $8,000
The order by Jeremy Co. was prepared and subsequently billed on 16th December 2019. Jeremy Co. agreed on paying the dues by 15th January 2020.
Froyo Inc. paid 100% advance for the order. The order was not processed, and hence, it was not shipped either.
The goods ordered by Praha Co. were prepared and subsequently shipped. The invoice, however, was not ready, and hence, it was not mailed to Praha Co.
In the scenario mentioned above, it can be seen that the order from Jeremey Co. was prepared and the amount is declared as Accounts Receivables on the Balance Sheet. This is because the order has been completed, and subsequently delivered along with invoices. This would be declared as a Current Asset on the financial statements of the company.
On the other hand, Froyo Inc. paid in advance. This is an example of unearned revenue. The amount has been received, but the goods are not yet delivered. This amount will be recorded in the financial statements (i.e. the Balance Sheet) as a Current Liability.
Lastly, as far as Praha Co. is concerned, the goods are prepared and shipped. The amount, however, has not been billed. This is still an amount that is owed to Jerry Co. and hence, this would be declared as a Current Asset on the financial statements of the company.
Journal Entry of Unbilled Revenue
From the example above, it can be seen that Praha Co. had an unbilled revenue equivalent to $8000. In order to record the aforementioned transactions, the following journal entries are made:
To record the sale (and the unbilled revenue)
|Unbilled Revenue (Current Asset)||$8,000|
The example above shows the sale that has been made, for which the invoice has not yet been delivered. This is a debit to the unbilled revenue (since it is a current asset), and the sales that have been made.
To record the transfer from unbilled revenue to accounts receivables
Once the invoice has been billed to the customer, the following journal entries are made:
|Unbilled Revenue (Current Asset)||$8,000|
Once the invoice has been billed, the category can now change from Unbilled Revenue to Accounts Receivable. This implies that the invoice has now been sent to the customer, and the customer will settle the account by paying the supplier of the given good.
To record the payment received from Praha Co.
Once Praha Co. settles the amount and pays Jerry Co., the following journal entries are made: