Money that has been earned but has yet to be received is referred to as accrued income. Mutual funds and other pooled assets that accumulate income over time but only pay dividends to shareholders once a year are, by definition, accruing income. Individual businesses can generate income without receiving it, which is the basis of the accrual accounting system. Let’s see the definition and the journal entry of an accrued income statement in this post.
What is Accrued Income?
Accrued Income is the income earned by the company in the ordinary course of business after selling goods or providing services to a third party but for which payment has not been received and is shown as an asset on the company’s balance sheet.
Accrued income is income earned by a company or an individual during the fiscal year but not received during the same fiscal period.
It can be any income for which the company provided goods and services to the customer but the customer has yet to pay. This income is sometimes applied to revenue generated for which the entity has not yet issued a bill. Furthermore, it has not yet been paid.
How Accrued Income Works
The majority of businesses use accrual accounting. It is an alternative to cash accounting and is required for businesses that sell products or provide services on credit to customers. The revenue recognition principle is the foundation of accrual accounting under the US generally accepted accounting principles (GAAP). This principle seeks to align revenues with the period in which they were earned rather than the period in which cash was received.
In other words, just because money has not yet been received does not preclude revenue from being earned.
According to the matching principle, revenue must be recognized in the same period as the expenses incurred in earning that revenue. Accrued income, also known as accrued revenue, is commonly used in the service industry or when customers are charged an hourly rate for work that has been completed but will be billed in a future accounting period. Accrued income is included in the balance sheet’s asset section because it represents a future benefit to the company in the form of a future cash payout.
Examples of Accrued Income
There are various ways in which it can occur in any business:
#1. Investing
Accrued income can be defined as earnings generated from an investment but not yet received.
For example, XYZ company invested $500,000 in bonds on March 1st in a 4% $500,000 bond that pays interest of $10,000 on September 30th and March 31st. Now, XYZ invested the money on March 1st, but because it was the first month, the company did not receive an interest income of $1,667 (i.e., $10,000/6) on March 31st of the same year. So, until September 30th, the company’s accrued earnings are $1,667.00 because the company knows that interest for March has been generated but will be received on September 30th.
#2. Rental Income
When the payment policies differ, rental income can be considered accrued income.
For example, a real estate company may rent out a building and decide to collect rent from tenants quarterly rather than monthly. Rental income will be treated as accrued earnings in this case. It is true because two months’ rent has been generated, but the company will receive that rent at the end of the third month of the same quarter.
#3. Service income
Assume a service provider company provides its services to a customer and the customer promises to pay after a certain period of time. The payment for those services will be considered accrued income.
Journal Entry for Accrued Income
It is a current asset for any business and affects the balance sheet as well as Profit & Loss A/c An accountant must complete the journal entry that debits A/c for accrued income and A/c for credit income
Journal Entry in the accrued income account
It must be added to the relevant income in the profit and loss account:
Balance sheet journal entry
On the asset side of the balance sheet, it is shown as a separate item under current assets.
Accrued Income Journal Entry Examples
Example #1
Assume ABC Ltd earned interest income.
on a $30,000 investment, only $25,000 is received, and $5,000 is still required to be received The accounts listed below show the impact of accrued earnings:
For Accrued Interest
For Interest Received
For-Profit & Loss Account
For Balance Sheet
Example #2
Here are some more journal entry examples:
Abhay Mittal Ltd. rents out some of the building’s space, and the renter agreed to pay the rent on a monthly basis. The renter did not pay the rent in June and asked the landlord to pay it the following month. As a result, the adjustment entry for this scenario should be:
How do you get rid of accrued income?
When you finally issue an invoice for the goods that the customer has had, you can deduct the accrued income as follows:
- Dr. Sales Control Account (now that you have raised an invoice)
- Cr Accrued income (removing our ‘uninvoiced receivable’ now that it has been invoiced)
What is double entry for instant payment?
If we earn some income by delivering goods to a customer and the customer immediately pays for those goods, the double-entry is:
- Dr. Cash’s (the asset that we now own)
- Cr Revenue (the income that we have generated from delivering the goods)
This is a cash transaction.
What is credit order double entry?
If we earn income by delivering goods to a customer and they don’t pay right away, it’s usually because we give them a credit period. In most cases, we would send them an invoice as a request for payment at a later date. This has a double-entry:
- Dr. Sales Control Account (the asset of the receivables balance owed by the customer)
- Cr Sales (even though we haven’t been paid yet, we have still generated income by delivering the goods)
This is a credit transaction.
It makes no difference that we haven’t been paid for the goods yet. We delivered them to the customer and thus “earned” the income. As a result, the credit is still applied to the sales account.
What is the double entry for accrued payment?
- Dr. Accrued income (yet another asset). Consider this an ‘un-invoiced receivable.’)
- Cr Revenue (again, still recognizing the income generated as we have delivered the goods)
We have ‘earned’ the income as long as we have delivered the goods. It makes no difference that we have yet to send an invoice.
Accrued income is a current asset that is recorded on the balance sheet (the Statement of Financial Position) as trade receivables.
Deferred income
Deferred income is the inverse of accrued income. This is when we receive payment from a customer but have not yet earned the income (because we have not yet delivered the goods). It would happen if a customer paid in advance for goods that we were going to deliver in the future.
If we haven’t yet delivered the goods, we haven’t ‘earned’ the income and thus can’t recognize anything in the sales account. Instead, we record a liability known as deferred income. It may appear strange that we are recognizing a liability when dealing with a customer, but if they pay in advance for goods, we owe them that money until the goods are delivered. If we fail to do so, we will be required to repay them the money they have paid.
What is the meaning of double entry for deferred income?
- Dr. Cash’s (the payment we have received in advance from the customer)
- Cr Income Deferred (the liability we owe to the customer until we deliver their goods)
Nota bene: We do not recognize anything in the sales account as if we had received cash from the customer. This is because we haven’t yet completed the work that ‘earns’ this income.
Deferred income is a current liability that is recorded on the balance sheet as trade payables.
How do you get rid of deferred income?
When we deliver the goods to the customer, we have completed the work to ‘earn’ the income and will no longer be required to potentially repay them, so the double entry is:
- Dr. Deferred income (to remove the liability no longer needed)
- Cr Sales (now that we have ‘earned’ the income)
Other sources of income
In some tasks, the ‘income’ being dealt with maybe something other than product sales, such as rental income. The basic double-entry here is similar to the one above.
So, if a tenant has occupied some of our property (meaning we’ve ‘earned’ the income) but we haven’t yet invoiced them, this is accrued income:
- Dr. accrued income
- Cr Rental income (instead of sales)
If a tenant pays in advance for the next period, it is considered deferred income because we have not yet ‘earned’ the income:
- Dr. Cash’s
- Cr Deferred income
Accrued Interest Income
Another example of accrued income is interest earned by a company on an investment. Assume that Company ABC makes an investment on March 1st. Every March 1st and September 1st, the investment pays $1,000 in interest.
ABC earned one month’s worth of interest on its investment at the end of March, but it will not receive an interest payment until September 1st. ABC’s accrued interest income is the month’s worth of interest – approximately $166 – that ABC earned but did not receive at the end of March.
This will result in a $166 credit to the “interest income” account and a $166 debit to the “interest receivables” account.
The Value of Deferred Income
Deferred income is critical in accrual accounting because companies occasionally receive advances for their goods or services. To avoid overstating certain accounts, businesses must distinguish between revenue earned and revenue yet to be earned. A deferred income account, which is a liability account, must be recorded in advance for goods and services to be provided.
A prime example of where things can go wrong is when companies fail to distinguish between earned and unearned revenue and continue to deposit accrued revenue into the revenue account. When there is a lack of differentiation, both revenue and net income are overstated. As a result, all financial statements are affected.
As a result, understanding accrued income and accrual basis accounting is critical to avoiding financial statement errors.
Accrued Income FAQs
What is the difference between accrued income and accounts receivable?
Accounts receivable are bills sent by a company to clients that have not yet been paid. Accrued income is money earned by the company but not yet invoiced to the client.
How is accrued income treated?
Accrued Revenue is classified as an Account Receivable after a company invoices the client for the goods or services given until the customer pays the bill. As a result, it is classified as a current asset on the balance sheet.
What does accrued mean in accounting?
An accrual is a type of accounting adjustment used to track and record revenues generated but not received or expenses incurred but not paid.
