What Is Accrued Income?
Let me tell you directly: accrued income is the money a company has earned through its regular business activities, but it hasn't been paid yet, and no invoice has even been sent to the customer. Think about mutual funds or pooled investments that build up income over time and only pay out once a year—they're accruing income by definition. Individual companies do the same when they earn revenue without immediate cash, which is the core of accrual accounting.
Understanding Accrued Income
You need to know that most companies rely on accrual accounting, which is different from cash accounting and essential if you're selling on credit. Under U.S. GAAP, it follows the revenue recognition principle, matching revenues to the period they're earned, not when the cash comes in. Just because the money isn't in your hands doesn't mean you haven't earned it. This ties into the matching principle, where revenues align with the expenses that generated them. You'll see accrued income in service industries or hourly billing setups, where work is done now but billed later. On the balance sheet, it's an asset because it promises future cash.
Revenue Recognition
In 2014, the Financial Accounting Standards Board introduced Accounting Standards Code Topic 606 to standardize revenue recognition across industries, making financial statements more comparable. They followed up with amendments like ASU No. 2015-14 for deferring the effective date, ASU No. 2016-08 on principal versus agent considerations, ASU No. 2016-10 for performance obligations and licensing, and ASU No. 2016-12 for practical improvements. These updates clarify how to handle revenue from contracts with customers.
Examples of Accrued Income
Consider a company that picks up trash for communities and bills $300 every six months. Even without payment, it records $50 in accrued income and revenue each month because the work is done and expenses are incurred. When the cash finally arrives after six months, you debit cash and credit accrued income to zero it out. This applies to your paycheck too—if you're salaried and paid biweekly, your income accrues over those days. At payout, it resets, but if you leave, any earned but unpaid amount is still due.
Frequently Asked Questions
Is accrued income an expense or a liability? It's an asset on the balance sheet, while accrued expenses are liabilities. What's an example of accrued revenue? If you provide a $1,000 service in May but get paid in August, record it as accrued in May and recognize it in August. Is accrued income a debit or credit? After the service, it's a credit to income and debit to accounts receivable.
The Bottom Line
Accrued income is how you record earnings under accrual accounting—when they're earned, not received—unlike cash accounting that waits for the money. This method ensures your financials reflect reality as it happens.
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