Understanding Accrued Income with Examples

The cost accounting of most companies is based on the actual realization of money received and spent. Cash inflow represents revenue, and paid-off bills are expenditures. But not all companies work the same way. Some companies record accounting numbers that are based on accrued income.

You will have a better understanding of what is accrued income and how it works in this article. Keep reading further.

Accrued income is income that a business has earned but not yet received. It is considered an asset on the balance sheet of a company. The income which is accounted for but not yet realized is regarded for the same accounting period. Most of the funds and investments that earn income every year are a good instance of this type of income.

Accrued income method is useful for companies that sell goods and services to their customers on credit. It is often used in the service industry where customers are charged for work that has been completed.

Such income will be recorded on the accounting books when it is earned but before the cash has been received. During accrued income accounting, the expected revenue is matched or compared with the revenues earned rather than the cash actually received.

Both an individual and a company can have accrued income. For a company, it is mostly accrued revenue, whereas, for an individual, it is accrued income. A company considers accrued interest as an asset in the company’s balance sheet as it ensures future income for the company.

Accrued income is usually mentioned under the current assets section of the balance sheet in an accrued receivables account.

Following are some practical examples of accrued income or revenue which will help you understand the concept:

• Investment: Suppose an individual invests in a mutual fund that has a lock-in period. During the lock-in period, the interest gets accrued but cannot be realized until the end of that lock-in period.
• Subscription: Suppose a company provides a service to its customers which renews monthly. In this case, a monthly subscription charge is applicable to the customer, which means that the customer is billed in advance irrespective of when he/she decides to use the service.
• Deferred sales: Another good example can be the deferred payment method of goods and services. Here, the buyer and seller sign a contract that states that only after delivery of a specific number of units the entire payment will be made. The buyer makes an advance payment representing the total amount and pays the due only after delivery of the promised units.

Accrued income or revenue reflects the potential income of the company during a financial year. This accounting method is mostly used by companies that offer their services on credit. When done correctly, accrued income accounting can help organizations identify probable financial problems and prepare a strategy accordingly.