In accounting, what is an accrued receivable?

Introduction / Context:
Accrual accounting requires companies to recognise revenues and expenses in the period in which they are earned or incurred, regardless of when cash is received or paid. Accrued receivables arise when revenue has been earned but no invoice has yet been issued or cash received. Understanding this concept helps in correctly recording assets and revenues at period end. This question asks you to identify the correct definition of an accrued receivable.

Given Data / Assumptions:

• The business uses accrual accounting, not pure cash basis.
• Revenue is recognised when the earning process is substantially complete and collection is reasonably assured.
• Sometimes services are rendered or interest is earned before an invoice is raised or cash is collected.
• We are distinguishing accrued receivables from unearned revenue, prepaid expenses, and bank loans.

Concept / Approach:
An accrued receivable is a type of asset that represents revenue already earned but not yet billed to the customer. Common examples include interest earned on investments but not yet received, or consulting services rendered near the end of an accounting period for which an invoice will be issued in the next period. To comply with the revenue recognition principle, the company records the revenue and an accrued receivable at period end. When the invoice is later issued and cash collected, the accrued receivable is reversed or reclassified.

Step-by-Step Solution:
Step 1: Focus on the word accrued, which in accounting usually means earned or incurred but not yet received or paid in cash. Step 2: Recognise that a receivable refers to an amount owed to the business, typically related to revenue. Step 3: Combine these ideas: an accrued receivable must be revenue earned but not yet billed or collected, and it will be recorded as an asset. Step 4: Evaluate option a, which matches this explanation exactly, describing revenue earned but not yet billed or collected and treated as an asset. Step 5: Evaluate option b, which describes cash received in advance; this is unearned revenue or deferred income, a liability, not an accrued receivable. Step 6: Evaluate option c, which refers to prepaid expenses, where cash has been paid before the expense is incurred. Step 7: Evaluate option d, which describes a loan, which is a liability, not a receivable. Step 8: Conclude that option a is the correct definition of an accrued receivable.

Verification / Alternative check:
Imagine a company that has a fixed deposit earning interest at the rate of Rs 10,000 per month, but interest is credited to the bank account only once every quarter. At the end of the first month, under accrual accounting, the company has earned Rs 10,000 of interest, even though no cash has been received yet. It records: Debit Accrued Interest Receivable 10,000 Credit Interest Income 10,000 This entry shows that revenue is recognised and an accrued receivable is created. When the bank actually credits the interest, the accrued receivable is adjusted. This example confirms the meaning described in option a.

Why Other Options Are Wrong:
Option b is the opposite situation: cash received before earning revenue, which creates unearned revenue (a liability). Option c describes prepaid expenses, where the company has paid cash but not yet received the service or benefit. Option d is clearly a liability, representing an obligation to repay borrowed money, not an asset representing money owed to the company.

Common Pitfalls:
Learners sometimes confuse accrued receivables with unearned revenue because both involve timing differences between cash and revenue recognition. The key distinction is whether the company has already earned the revenue. If services have been rendered but not billed, it is an accrued receivable. If cash has been received but services not yet performed, it is unearned revenue. Similarly, do not confuse accrued receivables with regular trade receivables; in many systems, accrued receivables are used specifically for end of period adjustments before invoicing.

Final Answer:
An accrued receivable is revenue that has been earned but not yet billed or collected, recorded as an asset until invoiced and received.