Accrued income, in accounting, refers to revenue earned by a business or individual but not yet received. It’s the money a company has earned from providing goods or services, even if the customer hasn’t paid for them yet. This income is recognised under the accrual accounting method, which matches expenses with the revenue they generate, regardless of when the cash flow occurs. Accrued income has been earned but not received or recorded by the end of the accounting period.
What is Accrued Income?
Accrued income is recorded as an asset in the balance sheet because it represents a company’s right to receive future payments. Accrued income is a business’s income but has not been collected for its accounting period. This occurs when services have been provided or the products delivered, but their accompanying payment has not been collected for the accounting period. For example, a company renders consulting in December but only collects the money for it the following month. Therefore, the income would be recognised as accrued in that case. It would be identified in the current period to match the revenue with the expenses incurred to generate it, which is the primary principle of accrual accounting.
Accrued income is considered an asset in the balance sheet because it represents a future economic benefit. It is not without importance, however, to ensure that a firm’s financial statements will reflect the firm’s actual financial performance for a period, regardless of whether cash transactions have occurred or not.
Accrued Income Journal Entry
An accrued income journal entry records income earned but not received. This entry results in debiting an asset account, for example, accrued income or unbilled revenue, and crediting an income account. Thus, though payment is received later, it will be recorded in the proper period.
| Date | Account | Debit (₹) | Credit (₹) |
| (Period-End Date) | Accrued Income (Asset) | XXXX | |
| Revenue (Income) | XXXX |
Example of an Accrued Income Journal Entry
Example: A company provides legal services worth Rs.5,000 in December but will receive payment in January.
Journal Entry (December 31st):
| Debit: Accrued Income (or Accounts Receivable) Rs 5,000 Credit: Service Revenue Rs 5,000 |
This entry records the income in December, when the service was rendered, even though the cash will be collected later. When the payment is received in January, the following entry is made:
Journal Entry (January when paid):
| Debit: Cash/Bank Rs. 5,000 Credit: Accrued Income (or Accounts Receivable) Rs. 5,000 |
This method ensures that income is recognised when earned, aligns with the accrual accounting principles, and provides an accurate picture of the company’s financial position.
Accrued Income Example
To better understand accrued income, let’s look at a practical example:
Example: ABC Ltd. provides website maintenance services for Rs 2,000 in December, with the payment expected in January. According to the accrued income concept, ABC Ltd. must record the income in December, even though the payment will be received in January.
Accrued Income Journal Entry (December 31st):
| Debit: Accrued Income Rs 2,000 Credit: Service Revenue Rs 2,000 |
This journal entry ensures that the income is recognised in December, when the service was provided.
Payment Entry (January):
| Debit: Cash/Bank Rs 2,000 Credit: Accrued Income Rs 2,000 |
The accrued income account is cleared when the payment is received, demonstrating how accrued income ensures that financial statements reflect earned revenues, even if payment occurs later.
Features of Accrued Income
Accrued income has several key features that make it an essential part of the accrual accounting system. These include:
Income Recognition
Accrued income follows the accrual accounting principle of recognising income when earned, not necessarily when cash is received. This way, financial reporting by the company is reflected correctly since it has occurred within the proper accounting period.
Asset Classification
Accrued income represents the company’s legal right to receive cash in the future and is accounted for as an asset in the balance sheet, although there is no payment yet. This suggests that the company has earned the income, though payment has not been made yet.
Matching Principle
Accrued income deals with the matching principle, according to which revenues must be matched with expenses incurred to generate such revenues. The principal will ensure that incomes are accounted for in the same accounting period as their respective expenses and reflect true profitability properly.
Temporary Accounts
Accrued income may be classified as temporary since it is extinguished once the money is received. The counter entry is made to cash or bank when payment is made, where the accrued income account gets cleared.
Consistency in Reporting
Accrued income aids in attaining consistency and accuracy in the financial statements needed for economic trend analysis and performance valuation over time.
Applicable in Various Industries
The common industries that use accrued income are professional services, real estate, insurance, and utilities, where the services are rendered, products delivered, and payment received later.
How to Record Accrued Income?
Accrued income is recognised by passing a journal entry acknowledging the revenue earned but not yet received, ensuring that income is matched correctly with the accounting period to which it belongs by the accrual principle. Steps to record accrued income are
1. Identify Earned but Unreceived Income
Business activities are analysed to find instances in which income earned while providing services or delivering goods is still pending for payment. This ensures that no earned income is left unreported at the end of the period.
2. Pass the Journal Entry
Income earned is recorded by debiting accrued income as an asset account and crediting revenue as an income statement account, recognising the income in the books before receiving it.
3. Reflect in Financial Statements
The accrued income is a current asset in the balance sheet, representing future cash inflow. At the same time, the income statement recognises the related revenue, giving an accurate picture of profitability.
4. Adjust Once Payment is Received
The client pays, cash/bank is debited to record the receipt, and accrued income is credited to remove the accumulated income from the balance sheet and, in turn, represent the correct cash position.
Is Accrued Income a Debit or a Credit?
Accrued income is an asset account of the firm since it arises from a right to receive cash in the future. Therefore, accrued income is recorded as a debit in the company’s books. When income is earned but not received, the account (or accounts) under the account accrued income, or, more generally, accounts receivable, is debited; thus, the assets are increased on the balance sheet. Meanwhile, an account related to a corresponding account called Service Revenue is credited, reflecting the earned revenue in the company’s income statement.
Here’s how the entry works:
- Debit: Accrued Income (Asset)—Increases the asset on the balance sheet.
- Credit: Revenue—Increases the revenue on the income statement.
When the payment is finally received, the accrued income account is credited, and the cash or bank account is debited.
Example: A company has earned Rs. 3,000 in consulting fees but will receive the payment next month.
Accrued Income Journal Entry:
| Debit: Accrued Income (Asset) Rs. 3,000 Credit: Consulting Revenue (Income) Rs. 3,000 |
This entry records the income when earned. When the payment is received:
Payment Entry:
| Debit: Cash/Bank Rs. 3,000 Credit: Accrued Income Rs. 3,000 |
This clears the accrued income and recognises the cash received.
How is Accrued Income Treated in Accounting?
In accounting, accrued income is treated as a current asset on the balance sheet and recognised as earned revenue on the income statement, even if the cash has not yet been received. This treatment follows the accrual principle, ensuring that income is recorded in the period in which it is earned, not when the cash is accepted.
- Initial Recording:
- Debit the Accrued Income (Asset) account.
- Credit the Revenue (Income) account.
- Presentation in Financial Statements: Accrued Income appears under Current Assets on the Balance Sheet. The related Revenue appears in the Income Statement for the relevant period.
- Adjustment After Receiving Payment: When payment is received, debit Cash/Bank and credit Accrued Income to remove it from assets.
How is Accrued Income Different from Deferred Income?
Accrued income and deferred income are two opposite concepts in accrual accounting.
While accrued income is earned but not yet received, deferred income is cash received before it. Understanding their difference is crucial for accurate financial reporting and balance sheet classification.
| Aspect | Accrued Income | Deferred Income |
| Meaning | Income earned but not yet received. | Cash was received, but income has not yet been earned. |
| Accounting Treatment | Recorded as a current asset on the balance sheet. | Recorded as a current liability on the balance sheet. |
| Timing | Service/goods provided, payment pending. | Payment was received in advance, and the service/goods were not provided. |
| Examples | Interest was earned but not received, and the consultancy fee is pending. | Advance rent received, prepaid subscription fees. |
| Impact on Financial Statements | Increases revenue and assets immediately. | Delays revenue recognition until service is performed. |
Accrued Income FAQs
1. What comes under accrued income?
Accrued income includes interest earned, rent due, or services rendered but not received. It is recorded as a current asset.
2. Is accrued income a quick asset?
Accrued income is a quick asset because it is easily convertible into cash within a short period, typically within 12 months.
3. What is the treatment of accrued income?
Accrued income is recorded by debiting accrued income (asset) and crediting revenue, ensuring it appears in the correct accounting period.
4. What does income accrued but not due mean?
It refers to income earned over time but not yet claimable for payment as the due date has not arrived.
5. Is accrued income taxable?
Accrued income is taxable as it is recognised as earned revenue in the financial statements, even before cash is received.
