Accrued Income: Definition, Examples & FAQs
Accrued income refers to revenue that a company has earned but not yet received.
Accrued Income Explained
Accrued Income is another accounting term that deserves your attention, especially if you’re keen on understanding your business’s financials from a 360-degree perspective.
In essence, accrued income refers to revenue that has been earned but not yet received. It is often a result of services rendered or products delivered for which payment will be received at a later date.
This is again in line with accrual accounting, a method that records income and expenses when they are earned or incurred, irrespective of the cash transaction.
Imagine you’ve provided consulting services to a client who plans to pay you after receiving the final report. The moment you complete your service, even without payment, you have accrued income.
This income will be recorded in your accounting books as an asset because it is money that you’re expected to receive.
One of the advantages of accrued income is that it allows for more accurate revenue tracking.
By including revenues that are earned but not yet received, you’ll get a fuller, more honest snapshot of your business’s financial standing.
Failing to account for accrued income can underestimate your profitability and distort the overall business outlook.
Key Insights
- Accrued income is crucial for the revenue recognition principle, which states that income should be recognized when earned, not when received.
- Accrued income is considered an asset and is recorded on the balance sheet.
- It is an asset because it’s an amount that is owed to you. Having a complete picture of your earnings, including accrued income, provides a more solid base for strategic planning and decision-making.
An Example Of Accrued Income
Interest on Loans: If you’ve lent money and interest accrues over a period, but you collect it at the end of the period, the accruing interest is your accrued income.
Subscription Services: You provide a 12-month subscription service but bill quarterly. For the months you’ve provided the service but haven’t billed yet, the revenue is accrued income.
Project Milestones: You’ve completed certain project milestones for which the client will pay upon project completion. The value of completed milestones is recorded as accrued income.
Accrued Income vs. Deferred Income
| Criteria | Accrued Income | Deferred Income |
|---|---|---|
| Definition | Income that has been earned but not yet received. | Income received in advance but not yet earned. |
| Direction of Cash Flow | Cash is to be received. | Cash has been received. |
| Accounting Method | Aligned with Accrual Accounting. | Also aligned with Accrual Accounting. |
| Financial Statement Impact | Impacts both the income statement and the balance sheet. | Impacts both the income statement and the balance sheet. |
| Strategic Use | Useful for recognizing income that will be received in the near future. | Important for acknowledging income that will be earned in future periods. |
FAQs
Is accrued income an asset?
Yes, accrued income is recorded as an asset on the balance sheet, reflecting future receivables.
How is accrued income recorded?
Accrued income is recorded as an asset on the balance sheet and as revenue on the income statement, typically using journal entries.
How do you reverse accrued income?
When you eventually receive the payment, you’ll need to reverse the accrued income by crediting the accrued income account and debiting the cash or bank account.