Revenue Accruals for Professional Services: Monthly Playbook to Smooth Revenue Recognition

Revenue Accruals for Service Businesses

The month closes. You know your team delivered incredible work on a major client project, and payroll has already gone out the door. Yet your profit and loss statement shows a dip because the invoice for that work is tied to a milestone six weeks away. This disconnect between work performed and cash received creates volatile revenue swings that make forecasting unreliable and can alarm investors. It also masks potential cash flow gaps hiding between your expenses and your billing cycles. Without a systematic way to account for this earned but unbilled revenue, you are flying blind, making critical decisions based on incomplete financial data. Getting this right is fundamental to building a predictable, scalable service business.

Foundational Understanding: The What, Why, and When

For many early-stage service businesses, revenue is simple: it is the total value of the invoices you send out. This is called cash-basis accounting. It is straightforward and works well in the beginning. However, as your projects become larger and span multiple months, this method starts to break down. It fails to match the revenue you have earned with the expenses you incurred to earn it, like salaries and software costs. The result is a lumpy, inaccurate view of your company's performance.

This is where accrual accounting comes in. The core idea is simple but powerful: you recognize revenue when it is earned, not necessarily when you invoice for it. The process of recording this value is called a revenue accrual. The value itself is often called unbilled revenue, unbilled accounts receivable, or work in progress revenue. It represents the true value your team has delivered to a client within a specific period, even if you have not contractually been able to bill for it yet.

The benefits of this extra work are significant. Adopting a proper accrual process provides a true financial picture and solves critical operational challenges:

• Smoother Revenue Reporting: By matching revenue to the period it was earned, your monthly and quarterly reports become consistent. This stability reflects actual business momentum and is crucial for maintaining investor confidence.
• Improved Cash Flow Visibility: Accruals close the hidden timing gaps between payroll expenses and delayed client invoicing that create surprise cash-flow crunches. You can see what you have earned, which helps you manage what you can spend.
• Operational Scalability: It establishes a repeatable system for project-based revenue accounting. This moves you away from spreadsheet chaos and reduces the risk of costly year-end audit adjustments.

This is not just a good idea, it is a requirement under standard accounting principles. For US companies, this practice is governed by US Generally Accepted Accounting Principles (GAAP), specifically the standard ASC 606 (Revenue from Contracts with Customers). In the UK, the relevant standard is typically FRS 102. Both are built on the same core revenue recognition principle: recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled.

This does not mean you need to implement this from day one. In practice, the transition from cash to accrual accounting becomes necessary as operations scale. The key trigger is growth. Transition to accruals typically occurs as companies cross the $1M to $2M ARR threshold. At this stage, project complexity increases, and external stakeholders like investors and lenders require more accurate, GAAP-compliant financial statements. See our guide on When to Switch from Cash to Accrual Accounting for a decision framework.

How to Record Unbilled Revenue for Your Service Business: A Playbook

A reliable monthly accrual process turns financial reporting from a reactive scramble into a predictable system. It requires a clear method for measuring progress, a simple way to track it, and a standard procedure for recording it in your accounting software. Here is a step-by-step playbook for how to record unbilled revenue for your service business.

Step 1: Choose a Method to Measure 'Work Completed'

The first question is always, "How do I measure what we have actually earned?" You need an objective, consistent way to quantify partial project completion accounting. There are two primary methods used in professional services:

• Percent of Completion Method: This is ideal for projects where progress can be measured continuously over time. You calculate the percentage of the project that is finished and recognize that same percentage of the total contract value. Common ways to measure the percentage include hours worked versus total budgeted hours, or costs incurred to date versus total estimated project costs.
• Milestone Completion Method: This method is better suited for projects with distinct, verifiable deliverables. Revenue is recognized in full only when a specific milestone is achieved and accepted by the client. For example, completing the 'Discovery and Design Phase' of a software build might trigger recognition of 25% of the total contract value.

What founders find actually works is choosing the method that most closely reflects how value is delivered to the client and using it consistently across similar project types. If your project involves continuous effort, use the Percent of Completion method. If it has clear, client-approved deliverables, the Milestone method is likely a better fit.

Step 2: Track Progress in a Simple Spreadsheet

You do not need complex software for this. A straightforward spreadsheet is often sufficient to start. This tracker becomes the source of truth for your monthly calculation and is essential for unbilled income recognition.

Your spreadsheet should contain the following columns:

• Project Name
• Client
• Total Contract Value
• Project Start Date and End Date
• Budgeted Hours or Cost
• Revenue Recognized in Prior Periods
• For This Month: Hours Worked or Cost Incurred
• Calculation: Cumulative Percent Complete (%)
• Calculation: Total Revenue Earned to Date (Contract Value * % Complete)
• Calculation: Current Month Accrual (Total Earned - Previously Recognized)

At the end of each month, you or your project manager updates this sheet. This document is the backbone of your process for recognizing earned but unbilled revenue.

Step 3: Set Up Your Chart of Accounts

Before you can record the entry, you need the right place for it in your books. In your accounting software, such as QuickBooks for US companies or Xero for UK companies, you will need to add a new account.

Navigate to your Chart of Accounts and add a new account with these properties:

• Account Type: Current Asset
• Detail Type: Other Current Assets
• Account Name: Unbilled Accounts Receivable (or Unbilled Revenue, or Work in Progress)

This account functions similarly to your standard Accounts Receivable, but it specifically holds the value of work you have earned but not yet invoiced. As an asset on your balance sheet, it represents a future economic benefit you have a right to collect.

Step 4: Calculate and Record the Monthly Journal Entry

With your tracking sheet updated, the calculation is simple. Let's walk through an example of service contract billing and accrual.

Imagine a 3-month, $90,000 consulting project. At the end of Month 1, your team has logged 100 out of a budgeted 300 hours. You have not sent any invoices yet.

1. Calculate Percent Complete: 100 hours / 300 hours = 33.3%
2. Calculate Revenue Earned: $90,000 * 33.3% = $30,000
3. Create the Journal Entry: In QuickBooks or Xero, create a new journal entry dated for the last day of the month.

Debit (Increase) Unbilled Accounts Receivable: $30,000. This shows you have a new asset on your balance sheet, the right to collect this money later.

Credit (Increase) Service Revenue: $30,000. This ensures your P&L for Month 1 accurately reflects the $30,000 you earned.

This entry correctly places the earned revenue onto your income statement for the period in which the work was done. If you use Xero, see the Xero setup guide for specific instructions.

Step 5: Reverse the Entry and Avoid Double Counting

This is the most critical step to prevent errors. The key question is how to avoid counting the revenue again when you finally send the invoice. The answer is a reversing journal entry.

On the very first day of the next month (e.g., February 1st), you post the exact opposite of your accrual entry:

Debit (Decrease) Service Revenue: $30,000

Credit (Decrease) Unbilled Accounts Receivable: $30,000

This reversal zeroes out the accrual from the prior month. It feels counterintuitive, but it clears the slate for the new month. Now, when you eventually issue a $45,000 invoice for the first milestone, your accounting software will correctly record all $45,000 of revenue from that invoice. The timing of revenue is now correct for each individual month, and there is no risk of double counting. See our guide on Reversing Accruals: When and How for best practices.

Practical Takeaways

Implementing a revenue accrual process is not just an accounting exercise, it is a significant step toward operational maturity. By accurately recognizing earned but unbilled revenue, you gain a clear and consistent view of your company’s health. This allows for more reliable financial forecasting, builds confidence with investors and lenders, and helps you proactively manage your cash flow by understanding the gap between earned revenue and future cash receipts.

For service businesses scaling past the $1M ARR mark, this is no longer optional. The practical consequence of ignoring accruals is often painful conversations with your board or last-minute scrambles to clean up the books before a fundraising or diligence process. Start small. Pick your one or two largest, multi-month projects and apply this process. Build the muscle memory now. For more context, see the Cash vs. Accruals hub for guidance on when to move methods.

Frequently Asked Questions

Q: What is the difference between unbilled revenue and deferred revenue?
A: Unbilled revenue is an asset representing work you have completed and earned but have not yet invoiced the client for. Deferred revenue is a liability; it is cash you have received from a client for work you have not yet performed. One reflects earned income, the other an obligation.

Q: Can I use revenue accruals for fixed-price contracts?
A: Yes, revenue accruals are essential for fixed-price contracts that span multiple reporting periods. You would typically use the percent of completion or milestone method to determine how much of the total contract value to recognize as revenue in each month as the work is performed.

Q: How does invoicing a client affect my revenue accruals?
A: When you invoice a client, you record the transaction in your standard Accounts Receivable. The reversing journal entry you post at the start of each month ensures you do not double-count revenue. The accrual correctly times the revenue, while the invoice correctly records the cash you are due to collect.

Q: Do I need an accountant to implement a revenue accrual system?
A: While the concepts are straightforward, having an accountant or a fractional CFO set up the process is highly recommended. They can ensure your chart of accounts is structured correctly, the measurement method aligns with GAAP or FRS 102, and the journal entries are posted and reversed properly each month.