How does adjusting for accrued revenue affect financial statements?

Adjusting for accrued revenue has a significant impact on financial statements by increasing both revenue and receivables. Accrued revenue refers to income that has been earned but not yet received in cash or recorded in the accounting records. When an adjusting entry is made to recognize accrued revenue, it involves debiting an asset account (typically accounts receivable) and crediting a revenue account.

This adjustment ensures that the revenue is recognized in the period it was earned, which aligns with the accrual basis of accounting. As a result, reported revenue will reflect all income earned during the accounting period, thereby increasing total revenue on the income statement. Concurrently, because the company has not yet received the cash related to this revenue, accounts receivable also increases on the balance sheet, representing the expectation that this amount will be collected in the future.

This adjustment is crucial for accurately portraying a company's financial performance and position, as it ensures that financial statements reflect the economic reality of the transactions that have occurred within the period.