Accrued Income

Timing is everything in the field of accounting, businesses often make money that they haven't received yet, but they still need to include it in their financial statements to give a realistic image of how well they're doing. This leads us to the idea of accruing income, which is an important part of the accrual basis of accounting. This method tries to match income and expenses to the time period they belong to. If you don't keep track of accrued income correctly, your financial statements could be wrong or not comprehensive.

We'll go into great detail in this blog on what accrued revenue is, how to record it, and why it's important for proper financial reporting.

What is Accrued Income?

Accrued income is money that has been earned but not yet received in cash or recorded in the books at the end of the accounting period. The firm has the legal right to get this money in the future, hence it is a present asset.

Examples of income that has already been earned:

• Interest that has been earned on fixed deposits but not yet received.
• Rent that the tenant owes but hasn't paid yet.
• Commission earned but not paid by the end of the accounts.

According to the accrual principle, this kind of income must be recorded in the period it is earned, even if the cash isn't received until later.

Why is Accrued Income so Important?

It's important to only identify income that is certain and can be measured. Overstating accumulated income can make earnings look bigger than they are and mislead stakeholders. Auditors look attentively at entries for accumulated income, especially in businesses whose earnings change a lot.

1. Financial Statements That Are Correct

Recognizing accumulated income ensures that the profit and loss account shows the right amount of income for the accounting period.

2. Meets the Matching Principle

When keeping track of money, it's crucial to match the money you make with the money you spend to make that money. This balance is thrown off when income isn't recorded.

3. Planning your Money Better

Accrued income shows up on the balance sheet as an asset, which makes it easier to see how much cash is projected to come in and helps with making decisions and making predictions.

How to Account for Accrued Income?

This makes sure that income is counted in the right accounting period and then taken out of the accumulated income account when the cash is received.

When money is made but not received, write in your journal:

Accrued Income                 A/c          To Income                          A/c

 

When you get it (next period):

 

Bank or Cash Account         Dr.          To the Accrued Income       A/c

 

For example, interest on an investment

Let's say a business has an investment that pays ₹12,000 in interest every year, due every three months. As of March 31st, the end of the financial year, only ₹9,000 has been received. The last ₹3,000 is earned but not yet paid.

Entry for accrued income on March 31:

Dr.                                                          ₹3,000  To Accrued Interest                  A/c        ₹3,000                  To Interest Income                   A/c

 

When you get ₹3,000 in April:

Bank         A/c                                  Dr. ₹3,000            To Accrued Interest                    A/c ₹3,000

This makes sure that the income is correctly linked to the financial year it belongs to.

How does Accrued Income help?

Accrued income is a modest but important idea in accounting that makes sure money is counted at the proper moment, even if cash is late. It shows the real financial state of a corporation, helps with accurate reporting, and builds trust between investors and regulators. Knowing about accumulated revenue will help you think like a real accountant, not just about the numbers but also about when and how money is recognized. This is true whether you're studying for tests or keeping track of your business's finances.

 

Did you know? The idea of accumulated income comes from the accrual accounting system, which is what International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) say you have to do. It helps stop people from changing how they declare income dependent on cash flows, which makes financial statements more trustworthy.

 

Read More 

• NACH
• Multinational Corporations
• Departmental Undertaking
• Foreign Exchange Market

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Frequently Asked Questions (FAQs)

Are accrued income and accounts receivable the same thing?

Not quite. Accounts receivable usually means money made from selling goods or services on credit, while accumulated revenue is money made from things that happen over time, such rent, interest, or commissions.

Where does the balance sheet show accumulated income?

Accrued income is listed as a Current Asset on the balance sheet since it is money that will be received soon.

What happens to money that has already been earned in the following accounting period?

The accrued income account is reversed and the cash is moved to the cash/bank account once it is received. This makes sure that the money is not counted twice in the next period.