Accrued Income

« Back to Glossary Index

Accrued income, in accounting, is revenue that a company has earned but has not yet received in cash or recorded in its accounting books. This concept is fundamental to accrual accounting, where revenue is recognized when it’s earned, rather than when cash is received.

What is Accrued Income

Accrued income, in accounting, represents revenue that a company has earned but has not yet received in cash or recorded in its accounting books. It’s a key concept in accrual accounting, where revenue is recognized when it is earned, not when cash is received. This ensures that financial statements accurately reflect a company’s performance.

Importance of Accrued Income in Accounting

Accrued income is essential for accurate financial reporting because it helps in matching revenue with the period in which it was earned. This is in contrast to cash-based accounting, where revenue is recognized only when cash is received, potentially leading to distortions in financial statements.

Accrued Income Recognition

How is accrued income recognized?

Forfeited income is recognized when it is earned, typically through the completion of services, delivery of goods, or the passage of time (e.g., interest pay). Even if cash has not yet been received, recognizing revenue ensures that a company’s financial statements reflect its economic activities.

Examples of Accrued Income Recognition

Some examples of forfeited income recognition include:

Interest income on loans or investments that accumulate over time.

Service fees earned by a consulting firm but not yet invoiced or received.

Rental income from tenants for the current period, where payment is due at the end of the month.

Accounting Entries for Accrued Income

To record forfeited income, companies typically make journal entries. For instance, if a business earns $1,000 in consulting fees, the journal entry might debit “Accounts Receivable” and credit “Service Revenue” by $1,000 each. This reflects both the income earned and the liability to collect it in the future.

Accrued Income in Financial Statements:

Impact of Accrued Income on Income Statement

Accrued income positively affects the revenue statement by increasing revenue. This, in turn, can lead to higher reported net income for the period, reflecting the company’s earnings, even if it hasn’t yet received the cash.

Impact of Accrued Income on Balance Sheet

On the balance sheet, forfeited income appears as an asset under “Accounts Receivable” or a similar category. It represents the amount of money the company expects to receive in the future, indicating its right to collect this revenue.

Disclosure of Accrued Income in Footnotes

To enhance transparency, companies may provide additional details about forfeited income in the footnotes of their financial statements. This may include the nature of forfeited income, the period in which it was earned, and the expected timing of cash receipts.

Example

ABC Consulting is a reputable consulting firm specializing in business strategy and marketing. They have several ongoing clients for whom they provide monthly consulting services. ABC Consulting bills clients at the end of each month for the services rendered during that month. However, their billing process takes approximately two weeks, meaning that they don’t receive payment until halfway through the following month.

At the end of April, ABC Consulting provided consulting services to several clients throughout the month. The total fees for these services amount to $50,000. However, since they haven’t yet billed their clients as of April 30th, they need to account for this forfeited income in their financial statements.

Solution:

ABC Consulting follows the accrual accounting method, which means they recognize revenue when it’s earned, not when the cash is received. In this case, they must recognize the forfeited income for the services provided in April.

Accounting Entries:

April 30th:

Debit: forfeited Consulting Fees (Income Statement) – $50,000

Credit: Consulting Revenue (Income Statement) – $50,000

This entry records the earned revenue for the consulting services provided in April.

May 15th (when payment is received):

Debit: Cash (Balance Sheet) – $50,000

Credit: forfeited Consulting Fees (Income Statement) – $50,000

This entry reflects the cash receipt from the client, which clears the forfeited income from the balance sheet.

« Back to Glossary Index