What is unbilled revenue?
Unbilled revenue is money a business has made but hasn’t yet billed its customers. The company has made money by providing the goods or services agreed upon, but it hasn’t sent a statement to the customer yet to get paid. It’s shown as an asset on the balance sheet, also known as “accrued revenue.”
There are three possible reasons why your company may have unbilled income:
- Billing problems. If your system sends a customer bill after a regular billing date but before the due date, any payments made during that time will be considered unbilled payable. This shows how important it is to have a reliable subscription payment platform: getting correct, automated, and on-time invoices all the time will keep you from having this problem.
- Payments are made in advance. If you get paid before the due date, the money is considered an unbilled receivable because you haven’t yet paid the service bill. This happens when customers upgrade their product or buy extra services while their contract is still active.
- Payment to the agency or provider. Since income is recorded when it’s made, not always when cash is received, businesses that bill clients after providing services or reaching contract milestones will show unbilled revenue on their balance sheets.
- One-time jobs. After implementation or training is done, SaaS companies may charge customers for it.
Unbilled income is still essential to a business’s finances, even though it’s not yet in the bank. Based on the fact that they have already done the work, there is no chance they will not get paid. Instead, unbilled revenue is just ready to be billed and collected.
Synonyms
- Unbilled A/R
- Unbilled receivables
- Accrued revenue
Why it’s essential to keep track of unbilled revenue
It’s essential to keep track of unbilled income for three reasons:
- It would be best if you recorded that income. Generally Accepted Accounting Principles (GAAP) say that a business must record revenue as soon as it’s made, even if there isn’t an invoice to prove it. Keeping track of your contracts is the first thing you must do to know when and how much income to count from them.
- It’s an essential part of how well your business does overall. Earned income is part of the bigger picture. Your accounting team needs to know how much money the business will make from invoices soon to make accurate income projections, plan the budget, and decide whether to invest.
- It stops money from leaking out. Keeping track of all your accounts receivable correctly will keep you from missing out on any possible income because of lost or forgotten bills and bad tracking.
- If you don’t keep track of and report unbilled income, you’ll not follow GAAP and make essential business choices based on incomplete financial data.
- You lose money because of mistakes in bills and customer contracts that your team forgot to track.
- These risks can all cost your company a lot of money. One easy way to avoid these problems is to keep track of the money you’ve made but haven’t yet billed.
Not yet billed revenue vs. deferred revenue
Unbilled revenue is different from deferred revenue. People have given money to a business, but it hasn’t yet been made. This happens when people pay ahead of time for services or goods that haven’t been provided yet.
Deferred revenue is a liability on the balance sheet until the company delivers its product or provides its service. In non-accounting words, it is called a prepayment. After that, it shows up on the income statement as sales earnings.
There is a difference between this and unbilled earnings, money you’ve already worked for. You owe the customer a product or service, so delayed revenue is a liability. On the other hand, unbilled revenue is an asset because the customer owes you money, and you’ve already done what you agreed to do.
Businesses don’t record deferred income, which is another crucial difference. Debt-based revenue is in your account, but it won’t be counted until the company meets its responsibility to the customer (i.e., it’s “earned”). In the same way, you’ll record unbilled income before the payment.
How to Show Unbilled Income on a Balance Sheet
The balance sheet is used in accrual-basis accounting to keep track of income that hasn’t been billed yet. It’s marked as an asset, and the income account is credited. The pay statement has not changed.
- Find the unbilled income. This includes all the money you’ve made from finished or ongoing jobs that you haven’t yet invoiced and any advance payments from customers that you haven’t yet invoiced.
- Add unbilled income to your asset list. On your balance sheet, add a new account called “Asset.” Please write down the total amount for this group once you know it.
- Make changes to the account for unbilled income as you send bills to customers. The work will no longer be unbilled once you send the bill to the customer. It turns into accounts receivable.
Let’s look at an example to help you learn how to make journal notes and show them on financial statements.
Let’s say that CloudTech, a business-to-business software company, decides to make a custom CRM system for a large company. The project will take 12 months to finish and cost $60,000.
The contract says that payment for development and implementation will be due at the end. However, there are two milestones: the first version of the software will be due at the end of month six, and the final product will be due after 12 months. Each goal is worth $30,000, which is half of the deal’s total value.
When CloudTech reaches the first goal at the 6-month mark, it needs to write the following in its journal:
- Take $30,000 out of Unbilled Revenue
- Add $30,000 to the Revenue Account
At the 12-month point, when the project is finished, they will take back the previous accrual:
- Take $30,000 out of the Revenue Account
- Add $30k to “Unbilled Revenue.”
Since they’ll also bill the client, it’s no longer unbilled income. CloudTech will need to add the following to its accounts receivable:
- Take $60,000 out of Accounts Receivable
- Add $60,000 to the Revenue Account
How to Record Contract Revenue That Has Not Been Paid
For recognizing income, your company may need to follow either ASC 606 or IFRS 15. This depends on where it does business.
The ASC 606 Standard
GAAP says that the way to recognize income is based on ASC 606. In five steps, it shows how to find, measure, and report money made from customer contracts.
- Find the deal you made with a customer. You’ve already done this if you have a contract.
- List the duties to perform in the contract. These are your promises to give the customer things or services. They are part of the deal you made with them.
- Decide how much the deal is worth. This is the total amount your business thinks it will make (and the customer has to pay) for the goods or services.
- Divide the price of the deal among the obligations to perform. Divide up the money based on the value you’ve given so far (for example, milestones) or when the job is done if that’s how you and the customer agreed.
- Record your income when you meet a performance requirement. This happens after you give the service or product, and the customer is in charge. For instance, if you reach a certain point in an implementation job, you should count that as a part of your revenue, even if you don’t get paid until the end of the contract, which could be months away.
The IFRS 15 Standard
IFRS 15 is a similar rule for recognizing income, but it applies to companies in more than one country, like Canada, Australia, and the European Union.
The same five-step process is used in IFRS 15. The main difference is that ASC 606 lets businesses make rules that keep sales tax out of the deal’s price. IFRS 15 doesn’t have that.
How billing technology can help cut down on uncollected money
No matter what your business is, you’ll always have some unbilled income. But you want to keep it as low as possible since it’s money that people owe you for work you’ve already done.
This means using contract management software to ensure customers are billed on time, correctly, and automatically.
- It sets up automatic alerts for contracts to hit important dates and ends.
- They give customers a self-service portal to handle their subscriptions, plan changes, payment information, and bills.
- I am setting up a dunning management system to cut down on days of sales outstanding.
- Making reports will help you keep track of unbilled income, speed up the collection process, and make better predictions. Some of these are revenue backlog, deferred revenue (the value of services not yet delivered), and unbilled revenue (the value of services given but not billed).
- Connect your billing system to other business tools so that there is only one place where information about customers, payments, terms and conditions of contracts, and other things can be found.
Billing software handles all of this and works with your accounting software. With revenue recognition automation, your software can keep track of every one-time in-app subscription buy or delivery milestone instead of you having to do it by hand.
