What is Accrued Income – Meaning, Examples, and How It’s Recorded

Accrued income is the income that a company earns but has not yet received in cash. It is recorded in the accounts when the service is performed or goods are delivered, even if payment is pending.

For example, Mr. Arjun owns a consulting firm. In March, he completed a ₹50,000 project for a client, but the client will pay him in April. Mr Arjun records the ₹50,000 as accrued income in March to match the income with the month it was earned.

Example of Accrued Income Entry
 

This shows that the income was earned in March but received in April. Accrued income helps present a true picture of the company’s financial performance.

Accrued Income: Recording Earned Income Before Cash is Received

Accrued income is money a business earns but has not yet received. It happens when goods or services are provided on credit. The income is recorded immediately because the work is already completed, even though payment will come later.

This approach follows the accrual basis of accounting, where we match income to the period it is earned, not when payment is made. It helps show the real financial performance of a business in each reporting period.

For example, if a company completes a project worth ₹50,000 in March but receives payment in April, the ₹50,000 is recorded as income in March. At the same time, the company adds it as an asset under accounts receivable in the balance sheet, as the payment is still due.

Journal Entry for Accrued Income

Accrued income must be recorded in the accounting period in which it is earned, even if the payment has not yet been received. This approach ensures that financial statements reflect the true performance of the business.

Example:
On 31 March 2017, the Corporate Finance Institute (CFI) provided ₹75,000 worth of online learning resources to Lasdo Company. The client agreed to pay on 15 April. Since the service was delivered in March, CFI must record the income for that month.

The correct journal entry is:

• Debit: Accounts Receivable ₹75,000
   
• Credit: Service Income ₹75,000

This entry shows that CFI has earned the revenue and expects the cash later. The debit increases assets under accounts receivable, and the credit records the income earned, ensuring proper accounting under the accrual method.

Key Features of Accrued Income

Accrued income has some key features that help businesses record their earnings correctly, even if they haven’t received payment yet. These features make sure the income matches the time it was earned. The table below explains these points in simple terms.
 

Common Examples of Accrued Income

Accrued income can happen in many everyday business situations where earnings come before payment. These examples show how different types of income are recorded even when cash has not yet been received. The table below lists some common cases in simple terms.
 

Steps to Record Accrued Income in Accounts

Recording accrued income follows a few clear steps to ensure the accounts stay accurate and up to date. Here's how businesses usually handle it:

1. Identify Earned Income
   First, find out which income has been earned during the period but hasn’t been received yet. This is the amount that needs to be recorded.
    
2. Create a Journal Entry
   Record the accrued income in the books by making the following entry:
    
   • Debit Accrued Income (Asset): This shows the amount the company expects to receive.
      
   • Credit Income/Revenue: This shows the income earned during the period.
      
3. Post to the Ledger
   Move the journal entry into the general ledger. This keeps all financial records organised and accurate.
    
4. Adjust for Cash Receipt
   When the payment comes in, update the records. Reduce the accrued income (asset) and show that cash has now been received.

These steps help show a true picture of the company’s earnings, even if the payment comes later.

Accounting Treatment of Accrued Income

In business accounting, accrued income must be carefully recorded to reflect the true financial position. Even if the cash hasn’t arrived, companies still show the income when it is earned. This ensures that reports are accurate and complete. Here's how it's handled in simple steps:

Key Points:
 

• Companies record accrued income as an asset on the balance sheet because it is due to be received.
   
• At the same time, they record it as revenue in the income statement to reflect the earnings.
   
• This approach follows the accrual basis of accounting, not the cash basis.
   
• When the company receives payment, it updates the records to show that cash has come in and reduces the accrued income.
   

This method ensures that the company reports its income in the right period, even if the money comes later.

Difference Between Accrued Income and Deferred Income

Accrued income and deferred income are opposite accounting concepts. Understanding the difference between them is important for accurate financial reporting.

• Accrued Income is earned but not yet received. The service is done, but the company is still waiting for payment.
   
• Deferred Income is received in advance. The company has the money, but the service or work will be done later.
   

Example in Simple Terms:

• Accrued Income Example:
  A consultancy completes a project in March worth ₹30,000. The client will pay in April. The ₹30,000 is recorded as accrued income in March.
   
• Deferred Income Example:
  A software company receives ₹50,000 in March for a one-year subscription starting in April. The amount is deferred income until they begin the service.

By knowing whether income is accrued or deferred, businesses can show a true and fair view of their accounts and follow proper accounting rules.

Conclusion

Accrued income is the money a business earns but has not yet received. It is recorded in the accounts when the service is completed or goods are delivered, even if payment comes later. This approach gives a clear and accurate view of a company’s earnings and helps match income to the correct period. 

By recording accrued income properly, businesses follow accounting standards and maintain reliable financial records.It also helps investors and managers make better financial decisions based on true earnings.

FAQ’s

1. What is accrued income?
Accrued income is money a company has earned but not yet received. It is recorded when the work is done, not when the payment arrives.

2. Why do we record accrued income?
We record accrued income to show the actual earnings of a business in the right period.

3. Is accrued income an asset?
Yes, accrued income is a current asset because the company expects to receive the money soon.

4. When do we record accrued income?
We record it at the end of the accounting period if the income is earned but not received.

5. What are common examples of accrued income?
Common examples include interest on savings, rent due, and services completed but not yet paid for.

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