In short. Accrued revenue is revenue you have earned by delivering work but not yet invoiced. On a fixed-fee engagement, you measure it by applying the percentage of completion to the contract price: effort to date ÷ (effort to date + remaining effort). If that figure is higher than what you have billed, the difference is accrued revenue (an asset, called a contract asset or unbilled receivable under IFRS 15 and ASC 606); if it is lower, it is deferred revenue (a liability). The detail that decides the result: remaining effort has to be re-estimated, not derived from the original budget.
Why fixed-fee revenue is not what you invoiced
On time and materials, the question barely arises: this month’s days are billed next month, and what you deliver is what you bill. On a fixed fee, billing follows a negotiated schedule (a deposit at signature, milestones, the balance on acceptance) with no reason to match the effort actually delivered.
At every period end you therefore have two questions: what have we billed, and what have we actually delivered? Revenue is the answer to the second. For a consulting or IT services firm with a large fixed-fee share, the gap can amount to weeks of production, enough to distort the month’s margin, the year’s result and the cash forecast.
The percentage of completion method
Under IFRS 15 and ASC 606, revenue on a consulting engagement is usually recognised over time, because the client benefits from the work as it is performed. French GAAP reaches the same result through the percentage of completion method, its preferred method for contracts that run over time. In each case progress has to be measured reliably.
In a services firm, the most common measure of progress is effort, an input method:
Progress = effort to date ÷ (effort to date + remaining effort)
Effort can be counted in days or in cost. Days work when the team is homogeneous; cost is more accurate when a €1,200-a-day engagement manager and a €450-a-day junior developer work on the same deliverable.
A worked example: one project, two answers
An IT services firm signs a €120,000 fixed fee to rebuild a reporting tool, estimated at 200 days. The billing schedule is 30% at signature and 30% on delivery of release 1. At 31 December, the year end:
- 110 days have been spent;
- release 1 has been delivered, so 60% (€72,000) has been billed;
- the project manager re-estimates the remaining effort at 110 days: acceptance testing surfaced gaps, and the project will end at 220 days instead of 200.
| “Original budget” method | “Remaining effort” method | |
|---|---|---|
| Total effort used | 200 days (the estimate) | 110 + 110 = 220 days |
| Progress | 110 ÷ 200 = 55% | 110 ÷ 220 = 50% |
| Revenue to recognise | €66,000 | €60,000 |
| Billed to date | €72,000 | €72,000 |
| Year-end adjustment | €6,000 deferred revenue | €12,000 deferred revenue |
Measured against the original budget, the firm recognises €6,000 too much revenue. It is the most common mistake: a flattering margin at year end, then a margin hit the following year when the overrun materialises. The re-estimated remaining effort, not the starting budget, is what makes progress accurate.
Had the project been billed more slowly (only the €36,000 deposit), the gap would reverse: €60,000 − €36,000 = €24,000 of accrued revenue.
What if the fixed fee becomes loss-making?
Assume an average cost of €600 a day. At 220 days, the total cost reaches €132,000 against a €120,000 price: a €12,000 loss on the contract. French GAAP requires a provision for the full expected loss as soon as it is probable, rather than at the end of the project, and IFRS reaches a similar result through the onerous contract rules of IAS 37. One more reason to track remaining effort every month rather than at year end.
The journal entries
Accrued revenue (delivered more than billed)
| Account | Debit | Credit |
|---|---|---|
| Accrued revenue / contract asset | €24,000 | |
| Service revenue | €24,000 |
When the invoice is issued, the accrued revenue is reclassified to accounts receivable. In France, the accrual (account 4181, factures à établir) also carries the VAT that the future invoice will bear.
Deferred revenue (billed more than delivered)
| Account | Debit | Credit |
|---|---|---|
| Service revenue | €12,000 | |
| Deferred revenue / contract liability | €12,000 |
The deferred revenue is released to revenue as the remaining work is delivered. The rest of a services firm’s accounts are listed in GL codes for consulting firms.
Common mistakes
- Measuring progress against the original budget, as in the example: it overstates revenue on every project that overruns.
- Confusing progress with billing. A milestone billed is not a milestone delivered.
- Estimating progress by feel. “We are at 70%” with no effort to date or remaining effort behind it is a figure your auditor cannot test.
- Calculating once a year. Year end becomes a two-week exercise, and the monthly margin is wrong eleven months out of twelve.
- Forgetting the loss at completion. A probable loss should be provided for as soon as it appears.
Automating revenue recognition in an ERP
Done by hand, the calculation lives in a spreadsheet rebuilt at every close, project by project. An ERP for services firms can automate it, provided it does four things:
- Calculate each contract’s progress every month, from approved time and the remaining effort entered by the project manager, not once a year.
- Compare revenue recognised with revenue billed automatically, contract by contract, to derive the accrual or the deferral.
- Apply each billing model’s own rule: time and materials is recognised as days are approved, fixed fees by progress, subscriptions over the period they cover.
- Keep a trail of every calculation (effort, remaining effort, date entered) so the auditor can redo it.
Subscriptions and recurring fees
A maintenance or support contract billed annually, like a SaaS subscription, follows a different rule: revenue is recognised ratably over the period it covers. A €24,000 annual contract billed in January gives €2,000 of revenue a month. At 31 March, €6,000 has been recognised and €18,000 remains deferred revenue.
The data you need, contract by contract
The calculation needs three figures per contract: effort to date (approved time), remaining effort re-estimated by the project manager, and cumulative billing. The formula is not the hard part. The hard part is that these three figures usually live in three different tools, updated at different dates.
In AlibeeZ they sit in one place. Approved time feeds effort to date, the project manager updates remaining effort, and fixed-fee tracking compares forecast with actuals to calculate margin continuously, with an alert when a project drifts. Cumulative billing sits on the contract, and progress billing is one of the billing models it can carry. See project margin and forecast in AlibeeZ and our article on fixed-price forecasting.
Frequently asked questions
What is accrued revenue?
Revenue earned by delivering goods or services but not yet invoiced at the reporting date. It is recorded as an asset (accrued revenue, unbilled receivable or contract asset) and reclassified to receivables when the invoice is issued.
What is the difference between accrued revenue and deferred revenue?
Accrued revenue is work delivered before it is billed: an asset. Deferred revenue is an amount billed or received before the work is delivered: a liability. On a fixed-fee engagement, the same contract can move from one to the other as billing and progress alternate.
How do you calculate percentage of completion on a consulting project?
Effort to date ÷ (effort to date + remaining effort), in days or in cost. Remaining effort must be re-estimated at the calculation date rather than derived from the original budget.
What is the journal entry for accrued revenue?
Debit accrued revenue (or contract asset), credit revenue. When the invoice is issued, debit accounts receivable and credit accrued revenue.
Can revenue recognition be automated?
Yes, when progress is calculated from the same data as billing: approved time and remaining effort per contract. The system can then compare recognised and billed revenue every month and derive the accrual or deferral, while the project manager stays responsible for the remaining-effort estimate.
Is progress billing the same as percentage of completion revenue?
No. Progress billing is a contract term: you invoice the client the percentage achieved. Percentage of completion is an accounting rule that applies whatever the billing schedule. When both follow the same progress, there is no accrual and no deferral.
