Accrued income, also known as accrued revenue or unbilled revenue, represents the income or revenue that a company has earned during an accounting period but has not yet received payment for. Under the accrual basis of accounting, financial events are recognized when they occur, regardless of when the cash is exchanged. Accrued income is an important concept in accounting because it adheres to the revenue recognition principle, which states that revenue should be recognized when it is earned, not necessarily when it is received.
Accrued income typically arises when a company provides goods or services to customers but has not yet billed them or received payment. It is recorded as an asset on the company’s balance sheet, indicating that the company has a right to receive the payment in the future.
To account for accrued income, a company would record a journal entry that debits an accounts receivable or accrued income account and credits a revenue account. This ensures that the revenue is recognized in the same accounting period in which the goods or services were provided, in accordance with the revenue recognition principle.
Examples of common situations where accrued income may arise include:
- Interest earned: A company may have invested in bonds or lent money, earning interest that has not yet been received.
- Rent income: A landlord may have earned rent income during the accounting period but has not yet received the payment from the tenant.
- Service contracts: A company may have provided services to a customer based on a contract, but the billing cycle falls after the accounting period.
By recognizing accrued income in the financial statements, companies can more accurately reflect their financial performance during a given accounting period, providing a clearer picture of their financial health for management, investors, and other stakeholders.
Example of an Accrued Income
Let’s consider a hypothetical example to illustrate accrued income.
Imagine a company called “WebPro Design” that offers website design and development services. WebPro Design follows the accrual basis of accounting. The company’s accounting period ends on September 30th. WebPro Design has completed a website development project for a client on September 29th, and the agreed payment for the project is $10,000. However, the invoice will be sent to the client on October 1st, and the payment is expected to be received later in October.
To account for the accrued income, WebPro Design would record the following journal entry at the end of the accounting period on September 30th:
Debit: Accounts Receivable – $10,000
Credit: Web Development Revenue – $10,000
This journal entry recognizes the revenue earned from the website development project in the same accounting period in which the service was provided, even though the payment will be received in the following month. The Accounts Receivable account is an asset account that represents the company’s right to receive the payment from the client in the future.
By recording the accrued income, WebPro Design ensures that its financial statements accurately reflect its financial performance for the accounting period, providing a clearer picture of its financial position for management, investors, and other stakeholders.