Definition — accrued income
Accrued income (also called accrued revenue) is revenue a business has earned by delivering goods or services but has not yet billed or collected in cash. Under accrual accounting, the company records the right to receive payment as an asset before the invoice or payment is received.
Why it matters (revenue recognition and matching)
Accrued income exists because accrual accounting matches income to the period when it was earned, not when cash arrives. The revenue recognition principle requires businesses to report revenue in the same accounting period that performance obligations were satisfied. The matching principle then requires related expenses to be reported in that same period.
Where it appears on the statements
– Balance sheet: accrued income appears as an asset, typically recorded in accounts receivable or a specific “accrued revenue” line.
– Income statement: the corresponding amount is recognized as revenue in the period earned.
Basic mechanics (debits and credits)
– When revenue is earned but not yet billed or collected: debit an asset account (e.g., Accounts Receivable or Accrued Revenue) and credit a revenue account.
– When cash is received later: debit Cash and credit the asset account to remove the receivable.
Thus, accrued income increases assets (debits) and increases revenue (credits) at the moment it is recognized.
Is accrued income a liability or expense?
No. Accrued income is neither an expense nor a liability; it is an asset. (Accrued expenses—amounts owed for costs already incurred but not yet paid—are liabilities.)
Checklist: when to record accrued income
1. Has the work been performed or the goods delivered? (Performance obligation satisfied.)
2. Is the amount measurable with reasonable accuracy?
3. Is collectibility reasonably assured?
4. Has no invoice yet been issued and/or no cash collected?
5. Are related expenses recorded in the same period (matching)?
If yes to these, book accrued income.
Worked numeric example (monthly accrual with a delayed invoice)
Scenario: A contractor does continuous monthly work and will bill $300 at the end of a six-month cycle for services performed each month.
Monthly accrual entries (each month for six months)
– Debit Accrued Revenue (asset) $50
– Credit Service Revenue $50
Explanation: Each month $50 of revenue has been earned though no bill or cash payment exists.
When payment arrives at the end of six months (single receipt of $300)
– Debit Cash $300
– Credit Accrued Revenue $300
Result: The accrued revenue balance for that customer returns to zero; total revenue recognized over six months equals $300.
Alternate quick example (one-off sale)
If Service X is completed in May for $1,000 but paid in August:
– May: Debit Accounts Receivable $1,000; Credit Revenue $1,000.
– August (on payment): Debit Cash $1,000; Credit Accounts Receivable $1,000.
Key points and common pitfalls
– Do not wait for the invoice or cash to record revenue if the service has been provided and the amount is reasonably certain.
– Ensure you have evidence that performance obligations are satisfied.
– Watch collectibility—if payment becomes doubtful, consider an allowance for doubtful accounts or different timing.
– Follow applicable accounting standards (e.g., ASC 606 for U.S. GAAP) for contract and revenue recognition specifics.
Relevant references
– Investopedia — Accrued Income: https://www.investopedia.com/terms/a/accruedincome.asp
– Financial Accounting Standards Board (Revenue Recognition, Topic 606): https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156246597
– American Institute of Certified Public Accountants — Revenue Recognition resources (roadmap): https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/resources/revenuerecognition.html
Educational disclaimer
This explainer is for educational purposes only and does not constitute individualized accounting, tax, or investment advice. For specific transactions or financial reporting questions, consult a licensed accountant or financial professional.