Author: Sarthak Bhalerao
Table of Contents
- What is Accrued Income?
- Understanding Accrued Income
- Accrued income examples
What is Accrued Income?
Accrued income is the income where that company has recognized and recorded the transaction in its journal when it has been earned, but the cash payment hasn’t been received yet. In simpler terms, it is the money that has been earned but yet to be received. There are times when a company records a sales revenue even though they have received the payment from the customer for the service performed or goods sold. An example is when customers purchase goods on credit. In such situations, companies recognized that they are selling goods or performing a service even when they haven’t received any cash. This is known as Accrued Income.
Understanding Accrued Income
There are many companies that use accrual accounting. It is a very good alternative to the cash accounting method as it is necessary for companies to sell their product or services on credit. Under the US. GAAP. (the U.S Generally Accepted Accounting Principles), accrual accounting falls under the revenue recognition principle. This principle focuses mainly on when the revenues were earned rather than when the cash is received. In other words, just because money has not been received, that does not mean that the revenue was not earned. The principle also required that revenue must be recognized in the same period as the expenses that were incurred in earning that revenue. Accrued income is often used in the service industry or in cases where the customers are charged an hourly rate for work that has been completed but it will be billed in the future accounting period. Accrued income is always listed under the asset section on the balance sheet as it represents future payments to be made in the form of future cash payout.
Accrued Income Example
There are different types of ways through which accrued income can take place in the business:
Accrued income can be the earning generated(unrealized gains) from an investment but yet to receive. For example, ABC company invested in $500,000 in bonds on 1st March in a 4% $500,000 bond that pays interest $10,000 on 30th September and 31st March each. Now, ABC invested the amount on 1st March, but as it was the first month, so the company didn’t receive an interest income of $1,667(i.e., $10,000/6) on the 31st March in the same year. So, till 30th September, the amount of $ 1,667.00 is the accrued earnings for the company as the company knows that interest for March has been generated, but it will receive on 30th September.
- Rent Income:
Ren income can be considered as accrued income when the payment policies are different. If a real estate company gives a building on rent and decides to take the rent from a renter quarterly, not monthly. Here the rent of all three months will be generated but for the first 2 months, it will be considered as accrual earnings.
- Income from Services:
Suppose a service provider company provided its services to the customer and the customer promise to pay after some time. The payment regarding those services will be treated as accrued income.