Accrued Income

What Is Accrued Income?

Accrued income is a gain made which is yet to be received by the employee or lender. It’s earned like income, but it doesn’t show up on your paycheck. Instead, it is typically viewed as income to the business, which accrues interest over time. 

For example, sales commissions can be earned, but they aren’t paid for today, so these payments are considered accrued income. Similarly, public service jobs such as teacher salaries within certain states may have to be paid into a trust fund, in which case these payments also qualify for accrues.

A business can have several different accrues, including income from services rendered, earned profits, unearned profits, and certain purchase orders or bills.

Understanding Accrued Income

Accrual accounting is a concept for recognizing revenue which is an alternative to cash accounting. In this technique, revenues will be recognized when the goods are sold or the services before they have been delivered. Generally accepted accounting principles (GAAP) say that it is necessary for companies that sell products or provide services to their customers on credit. Under this method, it seeks to match revenues to the period in which they come from rather than receiving the cash receipt.

This, in short, means that revenue has been earned even if it has not yet been received.

The matching principle in accounting matches the revenue generated from a certain transaction or event with associated expenses related to the same transaction. Because it’s used in services, the term accrued income instead of accrued revenue is more appropriate. Accrued income represents a future benefit to the company in the form of a future cash payout. It is listed as an asset on the balance sheet because it is considered a part of current assets, not long-term assets.

Accrued Income Examples

Accrued income can take place in different types

Investment

Accrued income can be the earning generated from an investment but yet to receive. It can be income that has been taxed but still exists as cash on your bank account. Or, it could be an asset you have paid off but aren’t seeing any money from the sale of that asset yet.

For example, if you purchased shares in a business with the money you earned from a previous job that you put aside for retirement but haven’t yet received that money from that investment, that would be considered accrued income.

Rent Income

When the payment structure of rentals is different, it is possible to consider accrued income.

For example, suppose your rent is due on April 15, and you pay it on April 29. In that case, your income for the accounting period from April 15 – 30 will be recognized on June 15, even though your outstanding rent for the previous two months (i.e., money owing) is not recognized until the close of business on June 30.

Income from services

Suppose Company X provides services to Company Y and agrees to invoice Company Y after the services are performed and only understands that Company Y will pay the invoice. As a result of this arrangement, Company X records an accrued liability for Company Y.

Where is accrued income reported in the balance sheet?

Accrued income will be shown in the current assets section of the balance sheet. It could be described as accrued receivables or accrued income.

Accrued income statements are one of the most important and least understood financial statements that a corporation issues. This financial statement is a record of all revenue earned by the corporation since it was established. The nature of most companies’ business implies that they will accrue several types of revenue during the period between their balance sheet date and their income statement date.

How to Record Accrued Income?

Accrued income is income that has not been paid in full and is recognized by an entity (your company in this case) as available for payment at some later date.

For example, The ABC construction company provided the raw materials to XYZ company on March 31. It is clear that they will not receive the payment until April 15. But, as per the accrual accounting principle, whether the payment is received or not, it has to be recorded in the accounting period in which it is earned.

So, the ABC company will record this as accrual income as a credit. As per the matching principle, the debit will be shown in the balance sheet account or the accounts receivable account.