Must Knows

Accrued income: What is it?

[ecis2016.org] Know all about accrued income in this article with the help of examples

Accrued income constitutes income that has been earned but not yet received. Mutual funds, amongst other assets that pay their shareholders only once a year, are, by definition, accruing their income. 

Many small scale, as well as large scale, businesses are now using the accrual accounting system as an alternative to the cash system to earn more assets and make money. 

Accrual accounting works through the revenue recognition principle, under which sometimes, when consumers are paying an hourly rate for a service, it is not billed immediately but will be billed later. Accrued income is also listed in the balance sheet as it is a possible means of future cash revenue for the business.

Accrued income also applies to many individuals as well. For example, an individual working with a company is not paid at the end of each workday but is paid at the end of each month. In a way, he/she is also accruing their income while they work. 

Understanding accrued income with the help of examples

  • General example

A company delivers daily groceries to various houses and bills each house 900 INR for three months. 

The company is not billing anything for three months, except at the end of the month. 

But still, the company shows 300 INR credit and 300 INR debit each month on the balance sheet. The bill is not sent out, but the services are rendered timely.

In this way, the company accrues its income. 

  • Rent income

A company that rents out a building and decides to collect the rent bi-annually instead of monthly accrues its income. 

The monthly income is being generated, and the services are being rendered, but the company will receive the payment only after six months, thus accruing the income for the same. 

  • Investments

Investments made in stocks or mutual funds do not pay the buyer every day. The interest keeps on building up the amount, but the money shows up only by the end of the year. Thus, investments are an excellent example of accruing income. 

Accrued income vs unearned revenue

While both the terms may seem confusing to some people, accrued income is income that is earned after the services have been provided. 

Unearned income is income that is earned before the services have been provided. That is, the consumer has not yet received the service but has already paid for it in advance. 

Both these terms hence, are fundamentally opposed to each other and should not be confused!

Source: https://ecis2016.org/.
Copyright belongs to: ecis2016.org

Debora Berti

Università degli Studi di Firenze, IT

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