Loading the player...

What is 'Accrued Income'

Accrued income is earned in a fund or by a company for providing a service or selling a product that has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time but only pay out to shareholders once a year are by definition accruing their income. Individual companies can also accrue income without actually receiving it, which is the basis of the accrual accounting system.

BREAKING DOWN 'Accrued Income'

Many employees are paid every two weeks; they do not get paid at the end of each work day. If they leave the company, they are paid for that day of pay because it is earned, but it has not been paid out yet. The income that an employee earns is accrued over a period of time. At the end of the pay cycle, the employee is paid and the accrued amount returns to zero.

Accrual Accounting

Most companies use accrual accounting. It is the alternative to a cash accounting system and a necessary system for companies that sell products to customers on credit. Accrual accounting is based on an accounting convention that seeks to match expenses and sales to the period when they occurred. Just because money has not been received or billed does not mean it has not been earned. Also referred to as accrued revenue, accrued income is often used in the services industry or cases in which customers are billed hourly for work that will be billed in a future accounting period.

Accrual Income Example

For example, assume company A picks up trash for local communities and bills customers at the end of every six-month cycle. Even though company A does not receive payment for six months, the company still records the payment as a debit to accounts receivable. The bill has not been sent out, but the work has been performed and therefore revenue has been earned. So, if a company earns $12 million every six months, but it can only bill its customers twice a year, it accrues $2 million every month for six months in income until the bill is paid.

Accrued Income and Accrued Receivables

It is important to note the difference between accrued income and accrued receivables. Accrued income has not been billed. It is a receivable by definition, so it is listed as a receivable on the balance sheet, but the customer has not received the invoice. Once cash is received, the entry is reversed with a credit, and cash is debited for the amount of incoming cash.

RELATED TERMS
  1. Accrue

    The ability for something to accumulate over time. In finance, ...
  2. Accrued Interest

    1. A term used to describe an accrual accounting method when ...
  3. Accrued Dividend

    An accrued dividend is a liability that accounts for dividends ...
  4. Accruals

    Accruals are earned revenues and incurred expenses that have ...
  5. Dirty Price

    The dirty price is the price of a coupon bond that includes the ...
  6. Adjusting Journal Entry

    An adjusting journal entry occurs at the end of a reporting period ...
Related Articles
  1. Investing

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  2. Personal Finance

    Procrastinator's Guide To Bill Payment

    Avoid punishing late fees and keep your credit score intact with these 10 tips.
  3. Personal Finance

    The Simple Way Financial Advisors Pay Their Bills

    Using this simple bill-paying strategy will help ensure your bills are paid on time each month.
  4. Personal Finance

    Automating Your Bill Payments

    Automation can be a painless (and free) way to remove the stress of bill scheduling from your life - if you do it right.
  5. Retirement

    Can Your 401(k) Impact Your Social Security Benefits?

    Find out why income from a 401(k) does not affect the amount of your Social Security benefits, but how it can impact your annual tax bill if you earn too much.
  6. Personal Finance

    How to Pay Bills When Your Monthly Income Varies

    Paying bills with a variable income can be challenging at times and requires forward planning.
RELATED FAQS
  1. What is the difference between accrued expense and accrued interest?

    Learn the difference between accrued expense and accrued interest, and find out how to calculate accrued interest on a short-term ... Read Answer >>
  2. What's the difference between accrued expenses and accounts payable?

    Learn how companies use accrued expenses and accounts payable on their balance sheet and the difference between the two liabilities. Read Answer >>
  3. What does it mean to capitalize accrued interest?

    Understand what it means when a company capitalizes accrued interest. Learn what constitutes accrued interest and what constitutes ... Read Answer >>
  4. What's the difference between accrued expenses and provisions?

    Read about the differences between accrued expenses and provisions, and why a company might record one over the other in ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center