What is the implication of failing to recognize accrued revenue?

Failing to recognize accrued revenue leads to an understatement of both revenue and net income. Accrued revenue represents money earned for services or goods provided but not yet received in cash. According to the accrual basis of accounting, revenues must be recognized when earned, regardless of the timing of cash receipt.

When accrued revenues are not recorded, the financial statements will reflect lower revenue figures than what actually occurred during the accounting period. Consequently, this underreporting of revenue directly impacts net income by showing less profit than is truly realized. Accurately recognizing accrued revenue ensures that a company's financial statements present a true and fair view of its financial performance, allowing stakeholders to make informed decisions based on reliable information.