What Is Accrued Income?
Accrued income is money that's been earned but has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time—but only pay shareholders once a year—are, by definition, accruing their income. Individual companies can also generate income without actually receiving it, which is the basis of the accrual accounting system.
Understanding Accrued Income
Most companies use accrual accounting. It is an alternative to the cash accounting method and is necessary for companies that sell products or provide services to customers on credit. Under the U.S. generally accepted accounting principles (GAAP), accrual accounting is based on the revenue recognition principle. This principle seeks to match revenues to the period in which they were earned, rather than the period in which cash is received.
In other words, just because money has not yet been received, it does not mean that revenue has not been earned.
The matching principle also requires that revenue be recognized in the same period as the expenses that were incurred in earning that revenue. Also referred to as accrued revenue, accrued income is often used in the service industry or in cases in which customers are charged an hourly rate for work that has been completed but will be billed in a future accounting period. Accrued income is listed in the asset section of the balance sheet because it represents a future benefit to the company in the form of a future cash payout.
- Accrued income is revenue that's been earned, but has yet to be received.
- Both individuals and companies can receive accrued income.
- Although it is not yet in hand, accrued income is recorded on the books when it is earned, in accordance with the accrual accounting method.
In 2014, the Financial Accounting Standards Board, which establishes regulations for U.S. businesses and non-profits, introduced "Accounting Standards Code Topic 606 Revenue from Contracts with Customers" to provide an industry-neutral revenue recognition model to increase financial statement comparability across companies and industries. Public companies were required to apply the new revenue recognition rules beginning in Q1 2018.
Examples of Accrued Income
Assume Company A picks up trash for local communities and bills its customers $300 at the end of every six-month cycle. Even though Company A does not receive payment for six months, the company still records a $50 debit to accrued income and a $50 credit to revenue each month. The bill has not been sent out, but the work has been performed, and therefore expenses have already been incurred and revenue earned.
When cash is received for the service at the end of six months, a $300 credit in the amount of the full payment is made to accrued income, and a $300 debit is made to cash. The balance in accrued income returns to zero for that customer.
Accrued income also applies to individuals and their paychecks. The income that a worker earns usually accrues over a period of time. For example, many salaried employees are paid by their company every two weeks; they do not get paid at the end of each workday. At the end of the pay cycle, the employee is paid and the accrued amount returns to zero. If they leave the company, they still have pay that has been earned but has not yet been disbursed.