Accrued IncomeExplained with Journey Entry Examples
What is Accrued Income?
Accrued Income or Accrued Revenue refers to the money that a person or a company has already earned but without the receipt of cash.
Pooled assets that earn income over time are prime examples of Accrued Income where shareholders or investors are only paid once a year.
The same is true for service companies that bill by the hour and receive payment only when the work is completed and clients are invoiced.
Understanding Accrued Income
Majority of the companies today use the Accrual Method of Accounting.
This is based on the Revenue Recognition Principle which states that revenue should be recognized during the period that it is earned, and not on the period when cash is received.
Simply stated, revenue is recorded even if cash payment is not yet received.
This is in contrast to Cash Basis Accounting which only records sales and expenses when actual receipt and payment of cash is involved.
For companies that sell products or provide services on credit, the Accrual Method of Accounting allows them to accurately report sales on their Income Statement.
Apart from the Revenue Recognition Principle, another accounting principle that is important with the accrual method is the Matching Principle.
It states that revenues are recognized in the same period that the expenses have been incurred.
This means that for rendering a service where a company has already recognized revenue, an expense shall also be recorded as incurred for earning the related revenue.
Accrued Income is reported in the Balance Sheet as a Current Asset, representing the future economic benefit that will flow to the company.
The FASB issued the “Accounting Standards Code Topic 606 Revenue from Contracts with Customers” in 2014 in order to provide a revenue recognition model that is industry-neutral to allow comparability of financial statements across companies of different industries.
In Q1 of 2018, public companies were also required to apply the new revenue recognition rules.
Examples of Accrued Income
A Real Estate company rents out their apartments for $60,000 annually, payable at the end of each quarter.
In their books, they would record a monthly revenue of $5,000 and shall post a journal entry to record the accrued income as:
$5,000 rent per month x 12 months = $60,000 in rent annually
At the end of the quarter, when the payment has been received, the real estate company shall record a debit to Cash for $15,000 ($5,000 monthly rent recognized x 3) and a credit to Accrued Income for the same amount.
Another example of Accrued Income that pertains to individuals would be their paychecks.
Typically, employees receive their salaries at the end of each month.
Their income accrues each day that they have worked until the end of the month when they get paid their whole month’s salary.
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UC Davis "Using accruals and deferrals" Page 1. February 4, 2022
Texas A&M University "Financial Management: Cash vs Accrual Accounting" Page 1. February 4, 2022
Harper College "ACCRUAL ACCOUNTING CONCEPTS" Page 1. February 4, 2022
FASB "Accounting Standards Code Topic 606 Revenue from Contracts with Customers" Document. February 4, 2022