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Accrued income is a concept in accrual accounting that refers to income that has been earned but not yet received. Accrued income can originate from a number of different things, including investments, rent, services, and products sold on credit.Â
Regardless of when cash is received, accrued income is recognized in the period it is earned as a balance sheet asset and as revenue on the income statement. This complies with both the matching concept and the revenue recognition principle of accounting.
Interest revenue from a financial investment is an illustration of accrued income. Let's say a business puts $100,000 into a bond with a 6% annual interest rate that is paid every six months. Every six months the corporation will earn $3,000 in interest income, but each month interest income will also accrue. Accrued interest income of $500 will be recorded by the business as both an asset and revenue at the end of each month. The corporation will add $3,000 to cash and subtract $3,000 from accrued interest revenue when the interest payment is received.
Rent received from a property is another type of accrued income. Consider a scenario in which a real estate corporation leases a building to a tenant for $10,000 per month. At the end of each month, the tenant pays the rent. Even though it has not yet received the money, the real estate company will record $10,000 in accrued rent income as an asset and revenue at the end of each month. The real estate corporation will increase cash by $10,000 and decrease accrued rent income by $10,000 when the renter pays the rent.
A third example of accrued income is income from services performed but not billed. Consider a scenario where a consulting company offers a client services worth $15,000 in March but does not deliver an invoice until April. In March, when the services were rendered, the consulting company will report accrued service income of $15,000 as both an asset and revenue. The consulting firm will decrease accrued service income by $15,000 and increase cash by the same amount when the client pays the invoice in April.
Accrued income is crucial for assessing a company's performance and financial status. Instead of recognizing revenue and expenses as cash is received or paid, a business might do so by recording accrued income. As a result, the profitability and liquidity of the business are more accurately depicted.
Interest revenue from a financial investment is an illustration of accrued income. Let's say a business puts $100,000 into a bond with a 6% annual interest rate that is paid every six months. Every six months the corporation will earn $3,000 in interest income, but each month interest income will also accrue. Accrued interest income of $500 will be recorded by the business as both an asset and revenue at the end of each month. The corporation will add $3,000 to cash and subtract $3,000 from accrued interest revenue when the interest payment is received.
Rent received from a property is another type of accrued income. Consider a scenario in which a real estate corporation leases a building to a tenant for $10,000 per month. At the end of each month, the tenant pays the rent. Even though it has not yet received the money, the real estate company will record $10,000 in accrued rent income as an asset and revenue at the end of each month. The real estate corporation will increase cash by $10,000 and decrease accrued rent income by $10,000 when the renter pays the rent.
A third example of accrued income is income from services performed but not billed. Consider a scenario where a consulting company offers a client services worth $15,000 in March but does not deliver an invoice until April. In March, when the services were rendered, the consulting company will report accrued service income of $15,000 as both an asset and revenue. The consulting firm will decrease accrued service income by $15,000 and increase cash by the same amount when the client pays the invoice in April.
Accrued income is crucial for assessing a company's performance and financial status. Instead of recognizing revenue and expenses as cash is received or paid, a business might do so by recording accrued income. As a result, the profitability and liquidity of the business are more accurately depicted.
