Did you know that nearly half of companies (42%) struggle with revenue leakage? This could be due to unbilled revenue mismanagement. For Saudi business owners in industries like construction or logistics, this is a critical accounting concept that can’t be ignored. If not managed properly, it can lead to inaccurate financial statements, disrupt cash flow, and complicate decision-making.
In this blog, we'll break down everything you need to know about unbilled revenue accounting standards and their treatment. Let's begin by understanding what unbilled revenue really means.
Unbilled revenue occurs when your business has delivered a product or service but hasn’t yet sent the invoice to your client. This unbilled revenue is recognized when work is completed, and payment is assured under contract terms.
Often referred to as accrued revenue, unbilled revenue is recorded as an asset on your balance sheet. For example, if your business completes a project in December but sends the invoice in January, the earnings from that project are categorized as unbilled revenue until the invoice is issued.
Several factors contribute to the occurrence of unbilled revenue:
Properly accounting for unbilled revenue ensures your financial reports reflect your actual performance during a period. Let’s see how it manifests across different business models.
Unbilled revenue is common across various industries. Here's how it’s represented in different business models:
Now, let’s look at why it’s important to manage unbilled revenue effectively.
Mastering unbilled revenue accounting offers several important benefits for your business:
Now, let's look at how unbilled revenue fits with accrual accounting standards and affects your financial statements.
Accrual accounting ensures that your financial statements show revenue when it is earned, not when it is paid. This method helps provide a clear picture of your business’s financial performance during a specific period.
Unbilled revenue aligns with this approach as it accounts for earnings from completed work. To manage unbilled revenue, you need to follow accounting standards like IFRS 15 or ASC 606, which guide how and when to recognize revenue. These standards ensure revenue is recorded as work is performed, as long as the earnings can be measured reliably.
Understanding how to record unbilled revenue requires diving deeper into accounting practices.
Accounting for unbilled revenue means recognizing and recording earnings in the period they were earned. Under GAAP (Generally Accepted Accounting Principles), Accrued revenue is recorded in accrual accounting.
Here's how to manage unbilled revenue properly:
Determine the services or goods that your business has provided to customers, which haven’t been invoiced yet. This could include completed work or milestones achieved.
List unbilled revenue as a current asset on your balance sheet, as it represents income that your business is entitled to receive. It's typically categorized as "unbilled receivables" or "contract assets."
Journal Entry for Initial Recognition of Unbilled Revenue
In Saudi Arabia, businesses should follow the International Financial Reporting Standards (IFRS), specifically IFRS 15, for revenue recognition. Ensure you’re familiar with and comply with local accounting standards and regulations in KSA.
Keep track of unbilled revenue on a regular basis to maintain accurate financial records. This will help you stay on top of your cash flow and ensure that revenue is reflected properly in financial reports.
Issue invoices promptly once the revenue has been recognized and earned. This step converts unbilled revenue into accounts receivable, improving cash flow and ensuring accuracy in your financial statements.
Example: If your business completes a milestone worth SAR 100,000 in December but invoices in January, you would record the SAR 100,000 as unbilled revenue in December. When the invoice is issued, the amount will be transferred to accounts receivable.
Journal Entry for Transition to Accounts Receivable
After the invoice is issued, move the recognized unbilled revenue into accounts receivable.
Compliance with accounting standards such as IFRS 15 (International Financial Reporting Standards) or ASC 606 (Accounting Standards Codification) is essential for recognizing and treating unbilled revenue. These frameworks offer guidance on when and how to recognize revenue.
In Saudi Arabia, businesses must follow IFRS 15, which ensures that revenue is recognized accurately based on performance obligations being met. The Saudi government is encouraging businesses to fully adopt IFRS, aligning local financial reporting with international standards.
These principles ensure transparency and consistency in financial reporting, fostering trust and compliance. Now, let’s clarify the differences between unbilled revenue and a closely related concept—deferred revenue.
Unbilled revenue and deferred revenue are related but distinct concepts in accounting. While both impact a company's financial statements, they serve different purposes. Here’s a quick comparison of Unbilled Revenue vs Deferred Revenue:
Now that you understand the key differences, let’s look at some real-world examples to see how unbilled revenue works in practice.
Understanding unbilled revenue becomes easier with practical examples. Let’s look at two common business scenarios where unbilled revenue applies:
A consulting firm is working on a project for a client. By the end of December, the team completed a key deliverable worth SAR 112,500, but the invoice is scheduled for January. The SAR 112,500 was recognized as unbilled revenue in December, as the work had been completed.
A construction company is building a commercial complex in Riyadh. By the end of the month, it completes a phase of work valued at SAR 375,000. The invoice is only sent once the entire project milestone is reviewed, but the amount is recorded as unbilled revenue until invoicing occurs.
These examples highlight the importance of accurately reflecting completed work in financial reports. However, managing unbilled revenue comes with challenges.
Managing unbilled revenue can be difficult, and many businesses face common issues that may affect financial accuracy and cash flow:
To overcome these challenges, businesses must adopt effective practices, which we’ll explore next.
Here are some best practices to ensure accuracy and smooth financial operations:
Following these practices can help ensure accurate records, maintain healthy cash flow, and avoid unbilled revenue issues.
Unbilled revenue is typically managed using accrual accounting, which recognizes revenue when it’s earned, rather than when payment is received.
Example: Suppose you’ve signed a year-long service contract worth SAR 1.2 million. If services worth SAR 100,000 are delivered in a given month but not invoiced, that SAR 100,000 should be recorded as unbilled revenue. This ensures your monthly financial reporting remains accurate.
Managing unbilled revenue is key for accurate financial reporting and smooth cash flow. Following best practices and adhering to the unbilled revenue accounting standard ensures your financial records are compliant and transparent.
Mastering unbilled revenue helps your business grow, builds stakeholder trust, and improves decision-making. If your business struggles with unbilled revenue management, consider using Accounting software like HAL ERP to automate this process, ensuring greater accuracy.
HAL brings immense value to your business with:
Need more insights on HAL? Schedule a free demo and discover how we can make ERP work for you!
1. What is unbilled revenue?
Ans: Unbilled revenue is income your business has earned but hasn't invoiced yet. It's recorded as an asset until the invoice is sent.
2. How do I account for unbilled revenue?
Ans: You record unbilled revenue as an asset on your balance sheet and recognize it as income once the service or product is delivered.
3. What’s the difference between unbilled revenue and deferred revenue?
Ans: Unbilled revenue is earned but not invoiced, while deferred revenue is paid in advance but not yet earned. Unbilled revenue is an asset, and deferred revenue is a liability.
4. How does unbilled revenue affect cash flow?
Ans: It can create gaps in cash flow because the revenue is earned but not yet invoiced or paid. Timely invoicing helps prevent disruptions.
5. Is unbilled revenue an asset?
Ans: Yes, unbilled revenue is an asset. It represents money your business is owed for work completed but not yet invoiced.
6. What happens if unbilled revenue is mismanaged?
Ans: Mismanagement can lead to inaccurate financial reports, compliance issues, and cash flow problems.
7. Can technology help manage unbilled revenue?
Ans: Yes, using Accounting software like HAL ERP can automate tracking and invoicing to keep everything accurate and up to date.
