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A company’s balance sheet is home to financial information related to assets, which are items a company owns and uses to generate revenue. Accrued assets represent a specific category; items included here belong to the business but are not realizable. Accounting principles have very specific rules as to when a company can recognize certain items, such as accrued income. In this case, a company completes services for revenue but cannot realize it as full revenue because the buyer has not paid for activities related to the transaction. Other asset types may also fall under the accrued assets category.
Accounting principles seek to define many types of business transactions in simple manners. Many stakeholders rely on a company’s financial information primarily for decision-making purposes. Including revenue earned but not received in standard revenue accounts can result in misleading financial statements. Therefore, accounting principles allow for unrealized assets. Separating realized and unrealized revenue presents a better financial picture of a company’s financial situation.
Accrued assets occur in specific situations. The primary use of this account occurs at month end, when a company is still expecting to receive money for a transaction completed at an earlier time. For example, a rental company has yet to receive payment for a rental property by the end of June. The income will appear in a future financial period, so the company can record the transaction but not as full revenue. An accountant must then record the rent owed as an accrued asset, which will increase the company’s net wealth on the balance sheet for June.
The balance sheet has a few different sections for assets. Accrued assets fall under the current asset group, meaning the company expects to use or collect the asset within 12 months. A single line item is often necessary for each type of accrued asset a company reports on this financial statement. Large organizations, for example, may separate accrued assets by company or type if there are several occurrences of revenue earned but not received at month end. Disclosures may be necessary to describe subsequent major transactions expected to occur after month end.
If consistently large accrued assets are recorded each month, a company may come under review. Companies may attempt to delay revenue in order to avoid any associated tax liabilities. This situation may occur more frequently at year-end. Certain transactions will be recorded as unrealized, allowing a company to complete activities but not collect the revenue until after the end of the year, delaying any tax liabilities until the subsequent year.