What is Accrued Income? Explained With Examples

The majority of the time, when we think of accounting, we are thinking of the method of accounting based on cash which records revenue when cash is received, and expenditures are recorded as bills get paid. This isn't the only way of accounting, and it's certainly not the method that most companies use. Instead, they use the accrual accounting method, where the revenue is recorded as it's earned no matter when the amount was actually received. Expenses are recorded as incurred, regardless of when the money is paid.

Two key elements are part of the accounting method known as accruals. They are accrued expenses and accrued revenues. Accrued costs are incurred during one accounting period but will not be paid until the next accounting period. Accrued income is a type of revenue which is earned in one accounting period, but the cash doesn't arrive until the following accounting period. 

Did you know?

Accrual accounting allows for ease in planning because of reporting the revenues and expenditures in the same accounting period, and this brings reporting to a uniform and cohesive level.

What is Accrued Income?

Accrued income is the earnings you've accrued in an account with an accounting period of a month, quarter, or year. If you own a mutual fund, accrued income is the money you've earned through other investments but haven't yet received. This income is considered an asset because it serves as an estimation of what you'll earn. Your accrued income is your interest, so you can view it as a bank account. Accrued revenue is an account receivable for goods and services provided to clients.

In accounting, accrued income and expenses are recorded when they are incurred. As a result, the income and expenses are properly allocated to the appropriate accounting period. In addition, accrued expenses are recorded when they occur and are treated in the same way as accrued revenue. The difference is that the accrued income and expenses are recorded when they are incurred rather than paid.

In addition, noncurrent assets are recorded at their cost, regardless of when the money is received. This accounting principle aims to track income and expenses consistently regardless of when the cash is received. In other words, "recognition of revenue" is the accounting theory of accrued income. However, there are many exceptions to the rule. While some businesses report that their income is not yet collected, others have difficulties identifying it.

Many businesses record accrued revenue as a result of long-term projects. For example, a construction company may accrue revenue every month for delivering a new piece of hardware. The aerospace and defence industry also accrues revenue every year, owing to their contracts with the Indian government. Similarly, a landlord might book accrued revenue by recording each month's rent payments. The landlord might bill the Indian government for the rent while recognising the income only after the month ends.

Also Read: Everything You Need to Know About Accrued Expenses

Accrued Income Examples

If you are unsure what accrued income is, here are a few examples. 

Example 1:

A company may charge a household a fee of ₹6,000 every six months and then not receive payment for another six months. That money will be reported as accrued income. 

Example 2:

Another example of accrued income is interest from a bond investment. A company may earn ₹6,000 in interest during a particular period, which is one-sixth of the total semiannual ₹30,000 in interest.

Example 3:

Another example of accrued revenue is when a subscription box company bills customers monthly for subscriptions that aren't delivered yet. A subscription box company may bill its customers monthly for rent or insurance. 

Another example of accrued revenue is a business that receives a loan from another company. It bills the customer monthly, but the loan isn't due until two years later. Similarly, a SaaS company may accrue interest on its loan account for 6 months.

Example 4:

Another example of accrued income is the deferred sales of goods or services. Often, a supplier contracts to provide a specific number of units for a customer, but the customer defers payment on individual shipments until the entire amount is delivered. In this scenario, the buyer receives a sum of money that represents the value of the total amount of the order, and the supplier awaits payment.

Accrued Income in Balance Sheet

Here are a few examples of situations where accrued revenues can occur in certain scenarios:

• Accrued revenues from loans: Accrued revenues can be incurred when your business lends funds to a third party or an individual. The loan may be paid annually or semiannually, but your company can earn monthly interest income.
• Accrued revenue on long-term projects: Accrued revenues can occur on long-term projects if the transaction meets the other criteria for recognition, using the method of the percentage of completion. This allows your business to track revenue overtime when it sells an item or provides a service. Certain companies calculate the revenue margin and record revenues per unit completed.
• The revenue accrued at certain milestones: Accrued revenues can be earned at certain milestones that the operating business achieves. Businesses may choose this option rather than accruing revenue because they will incur expenses.
• Accrued revenue from software as a service (or SaaS): Accrued revenues can be beneficial for SaaS businesses, particularly ones that bill customers on a per-month basis. Revenue opportunities could be related to one-time purchases, upgrades/downgrades, or other transactions in a subscription.

Accrued Income Journal Entries

After knowing about accrued income definition, let's understand how it works with journal entries. The revenue component of a business's revenue is made up of accounts receivable balances from customers. The accrued income journal entry should show the corresponding balances. When the customer receives the invoice, the accrued revenue account is debited. 

The reversing entry shows a negative figure, which offsets the revenue statement. This entry only impacts the current period. Accrued revenue can be categorised into three main categories: receivables, sales receivables and accounts payable.

Expenses are categorised into two categories: accrued and billed. Accrued liabilities are expenses that have not yet been billed and are not fully paid. They are recorded in the books at the end of the accounting period. These liabilities are reversible: they are reversed in the liability account when the amount is paid. This creates a double-edged sword.

In the accrued income journal entry, the company X ltd. receives money from the bank for its products. It pays 6% interest per annum. Carriage Inwards A/C is debited. Interest is earned on accounts owned by the company. It is calculated by taking the sum of Principal x Rate x Time. Assuming this transaction is made on the last day of the accounting period, the interest is recognised on the date of the incurred expense.

If a business expects to earn ₹1,10,000 in rent but only receives ₹60,000, it must record a journal entry for the full amount. The same scenario applies if a company expects to earn ₹20,000 in commission but only receives half of the sum. This example will illustrate how accrued income is different from expenses.

Here's the example:

Let's assume XYZ PVT.ltd. Invested ₹50,000, in which only ₹45,000 is received and the balance is ₹10,000. Here are the accounts showing this impact of accrued earnings:

For Accrued Interest

For Interest Received

For-Profit & Loss Account

Conclusion

Accrued revenue demonstrates the performance of a business in the long run. Besides that, it helps to understand the contribution of the sales to profitability and long-run growth. Do online payment calculations to measure profit and loss make you annoyed? You can use Khatabook and measure all debit and credit transactions easily.
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