[green_tea]

Can someone help me understand this concept? It is something I came across work and it’s not something you can look up in a textbook. I work in the accounting department for a consulting firm. This is how it was explained to me but I might not be explaining it properly:

So say we are in August, but we are reversing the WIP from July, so it’s a debit to unbilled revenue, and credit to unbilled services. You reverse the WIP of the previous month so there is no longer an asset.

Then you record the current month (August) and recognize revenue and anything unbilled. You put unbilled services as an asset, and then credit unbilled revenue, basically doing the reverse.

I guess someone who has done the accounting work for a consulting firm might know better how to answer this question.

Is this like accrued revenue? I am not familiar with the names of the accounts like unbilled revenue and unbilled services. Maybe the accounts are named incorrectly?

[M.O.D.]

I understand the concept. Some of the progress billing and installment billing used under long term contracts hold future revenue in asset accounts.

They are essentially relabeling the WIP (work in progress) asset by moving it to to a different account.

I don't understand why they would do this. If they are holding on to future profit, it would be a contra-asset account.

It is possible they are trying to hide their costs vs their revenues so readers could not calculate their gross profit margin, by reporting everything under one account.

Read construction contract accounting and revenue recognition after delivery installment method/cost method, and you will see similar entries, but GAAP motivation is probably different.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
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[mla1169]

In a service company the largest expense on your P&L is payroll-you're paying someone to perform the service. It's not always possible to bill out every hour of work performed during the calendar month but you've got an expense for payroll sitting there. To match expenses to revenue (GAAP) you'll want to show the corresponding revenue on your P&L so you need to credit unbilled revenue in your income statement ( credits increase revenue, not decrease) and the offset will be an asset on your balance sheet (in this case a debit to unbilled services). I think the confusion is that you're picturing both as balance sheet accounts and thinking the entry cancels itself out.

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[Anonymous]

mla's answer probably provides most of the information you're looking for, but one other thing I wanted to point out is that using a different name for something isn't necessarily a “wrong” name. In textbooks, the names are very static – you can hop from one textbook to another and find the exact same names used everywhere. However, even though those are academic standard, they are not “right” or “wrong” and are not necessarily used in the real world. So, try to think of the account names from studying as descriptions or guides to what the contents are, rather than the right name for the accountant. I would say from your description that “accrued revenue” would be an equivalent term. Both terms indicate the same thing – this is revenue for which we have performed the services and to which we are entitled, but which we haven't received yet.

[green_tea]

Thanks everyone for your input. It's really helpful.

[Author]

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