Accrued Income (Accrued Revenue)

Definition

Accrued income, also referred to as accrued revenue, is the income that has been earned during an accounting period but has not been received by the end of that period. According to the accruals concept, income should be recognized when it is earned, regardless of when the cash is received. Typical examples include interest income, rent, and dividends.

Accrued income is documented as a current asset on the balance sheet because it represents revenue that is due but not yet collected. This treatment ensures that financial statements reflect the economic reality and adhere to the matching principle, which matches revenues with the expenses incurred to generate them during the same period.

Examples

1. Interest Income: A company earns interest on investments but has not yet received the cash as of the end of the reporting period.
2. Rental Income: A landlord has a tenant who pays rent quarterly in arrears. At the year-end, two months’ rent is due but not yet received.
3. Professional Services: An accountant performs services in December but the payment is not received until January of the following year.

Frequently Asked Questions

What is the accruals concept in accounting?

The accruals concept states that income and expenses are recognized when they are earned or incurred, not necessarily when the cash is received or paid. This principle helps provide a more accurate financial picture of a company’s operations during a specific period.

How is accrued income recorded in the financial statements?

Accrued income is recorded as a current asset on the balance sheet under accounts receivable or accrued income. It is also included in the income statement as revenue for the period it was earned.

What is the prudence concept?

The prudence concept, also known as conservatism, dictates that revenue and assets should not be overstated and expenses and liabilities should not be understated. This principle helps ensure that financial statements provide a cautious and less risky perspective of a company’s financial status.

How does accrued income affect profit?

Accrued income increases the profit for the period as it accounts for revenue that has been earned but not yet received. This ensures that the financial results accurately reflect the company’s performance.

Can accrued income become bad debt?

Yes, accrued income can become bad debt if, for example, the debtor defaults on their payment. This would then need to be written off as an expense in the financial period it is determined to be uncollectible.

Related Terms

Accrual Basis Accounting

A method of accounting where revenue and expenses are recorded when they are earned or incurred, not when the cash is received or paid.

Current Asset

Any asset that is expected to be converted into cash within one year, such as cash, accounts receivable, and inventory.

Accounts Receivable

Amounts due to a business from customers and other parties. These amounts are considered current assets as they are expected to be collected within the normal operating cycle.

Deferred Revenue

A liability that represents revenue that has been received but not yet earned. It is the opposite of accrued income.

Matching Principle

An accounting principle that dictates that expenses should be recognized in the same period as the revenues they helped generate.

Online References

1. Investopedia: Accrued Income
2. AccountingTools: Accrued Revenue
3. Corporate Finance Institute: Accrual Accounting

Suggested Books for Further Studies

1. Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield - Comprehensive guide to the principles of accounting, including detailed discussions on accrued income.
2. Financial Accounting: An Introduction by David Alexander and Christopher Nobes - Introduction to the fundamentals of financial accounting, including an explanation of the accruals concept.
3. Principles of Accounting by Belverd E. Needles and Marian Powers - Provides a solid foundation in accounting principles and practices, including accrued income and the matching principle.

Accounting Basics: “Accrued Income” Fundamentals Quiz

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