Accrued income refers to the money a company has earned in the regular course of business but has yet to receive, with the invoice still pending. It’s like potential energy waiting to be converted into cash.
Entities such as mutual funds or other pooled assets accumulate income over time and only pay it out to shareholders annually, thus accruing their income. Even without cash transactions, individual companies can generate revenue based on the accrual accounting system.
Key Takeaways
- Accrued income is the revenue that’s been earned but hasn’t yet been received.
- Both individuals and companies can recognize accrued income.
- In accrual accounting, accrued income is recorded when earned, not received.
How Accrued Income Works
Most companies rely on accrual accounting. Unlike cash accounting, this method is essential for companies offering credit to customers. Under generally accepted accounting principles (GAAP), accrual accounting aligns revenues with their earned period rather than the period of payment receipt.
This method acknowledges that revenue has been earned even if the payment hasn’t been received. Accrued income (or accrued revenue) is common in services billed post-completion, such as work charged hourly but invoiced later. Listed as an asset on the balance sheet, accrued income signifies future financial benefits.
In 2014, the Financial Accounting Standards Board (FASB) introduced guidelines to create an industry-neutral revenue recognition model, enhancing financial statement comparability. Public companies began applying new standards in Q1 2018.
Key amendments include:
- ASU No. 2015-14: Deferral of the Effective Date
- ASU No. 2016-08: Principal vs. Agent Considerations
- ASU No. 2016-10: Identifying Performance Obligations and Licensing
- ASU No. 2016-12: Narrow-Scope Improvements and Practical Expedients
Real-World Examples of Accrued Income
Company Example:
Imagine Company A offers waste collection services, billing $300 every six months. Despite receiving payments semi-annually, Company A records a $50 debit to accrued income and a $50 credit to revenue monthly. Though the bill hasn’t been sent yet, the work done and expenses incurred justify accruing the revenue.
When payment of $300 arrives, a $300 credit is made to accrued income and a $300 debit to cash, resetting accrued income for that customer to zero.
Individual Example:
For salaried employees, income accrues over time. People typically get paid bi-weekly, not daily. Each pay cycle’s end sees employees paid, nullifying the accrued amount. Even if an employee exits, they earn income up to that point, unsettled until the next pay cycle.
Related Terms: Accrued Revenue, Accrual Accounting, Revenue Recognition, Balance Sheet, Cash Accounting.
References
- Financial Accounting Standards Board. “No. 2016-10 April 2016: Revenue from Contracts with Customers (Topic 606)”.
- American Institute of Certified Public Accountant. “Financial Reporting Brief: Roadmap to Understanding the New Revenue Recognition Standards”.
