Accrued Income Explained: The Essential Guide to Your Business  

Accrued income refers to revenue earned from goods or services a company has delivered but hasn’t yet received payment. It’s an asset on the balance sheet because it represents money owed to your business for work already completed within a specific accounting period.  

Suppose you finished a project in March, but the customer pays in April. You’d still report the income for March. That earned amount becomes accrued interest income or accrued revenue. It’s earned but not yet received, and you’ll create an entry for accrued income to record it.  

Accrued Revenue Explained  

At the close of an accounting period, if a company has delivered goods or services but hasn’t received payment, it must still recognize that income in its financial statements.   

It involves increasing the accounts receivable and the revenue account to reflect income earned but not yet received. The revenue is not yet in cash form, but still represents an asset on the balance sheet.  

Recognizing accrued revenue accurately ensures an honest picture of the company’s financial position, especially for businesses with long-term projects or those operating on credit.   

It also aligns revenue reporting with actual performance rather than when a customer pays, which is critical under the accrual accounting method.  

To manage this, businesses need a reliable system to track invoices, monitor collections, and record accrued revenue on time.  

Let’s say a construction firm completes a project for a client on September 25, but the client won’t make payment until October 10. Even though the cash hasn’t arrived, the company records the accrued revenue in September to reflect the income that was earned that month. This improves the accuracy of the firm’s income statement and supports proper cash flow forecasting.  

How is Accrued Income Recorded?  

Accrued income is recorded during the accounting period when the revenue is earned, even if the customer hasn’t paid yet. This ensures the company’s financial statements reflect its true financial position by including income generated but not yet received.  

Accrued income is recognized through a journal entry that affects both the income statement and balance sheet:  

Debit: Accrued Revenue Account or Accounts Receivable (an asset on the balance sheet)  

Credit: Service Revenue (or appropriate revenue account on the income statement)  

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Let’s say a consulting company provides services worth $3,000 to a client on March 28, but the payment is received on April 15.  

Here’s how to record the accrued income at the end of March:  

Step 1: Identify the earned revenue  

Services were completed by March 28, so the company must recognize revenue when it completes a service, not when the customer pays.  

Step 2: Create the journal entry for March 31  

Debit: Accounts Receivable $3,000  

Credit: Service Revenue $3,000  

This entry shows that $3,000 has been earned but not yet received. It updates the income statement and increases net income for March.  

Step 3: Record the payment when received (April 15)  

Debit: Cash $3,000  

Credit: Accounts Receivable $3,000  

This removes the receivable and reflects the cash flows received.  

By recording accrued interest income or other types of revenue like this, companies using the accrual method ensure their financials are timely, transparent, and a true representation of a company’s financial health.  

FAQs  

1. Is accrued income a liability or an asset?  

Accrued income is an asset on the balance sheet. It represents income earned but not yet received in cash. Since the company expects to receive payment, it’s classified under accounts receivable or a similar accrued revenue account, not as a liability.  

2. What is the journal entry of accrued income?  

The typical journal entry to record accrued income is:  

Debit: Accounts Receivable (or Accrued Revenue) – to recognize the expected cash inflow (an asset on the balance sheet)  

Credit: Service Revenue (or appropriate revenue account) – to reflect that the revenue is earned during the accounting period  

This ensures the income statement and financial position are updated accurately.  

3. What is the difference between accrued income and deferred income  

Accrued income is earned but not yet received. The company has completed a service or delivered goods, but the customer pays later. It’s an asset.  

Deferred income (or unearned revenue) is received but not earned. The business gets paid in advance but hasn’t yet provided the service or product. It’s a liability on the balance sheet until the work is done.  

4. What is the difference between accrued and earned income?  

Accrued income refers to revenue that has been earned during a period but has not yet been received. On the other hand, earned income is a broader term that includes any income generated from providing goods or services, regardless of when payment is received.