Accrued Income Journal Entry

Accrued income is income that has been earned but not yet received. This can happen when services are rendered but not invoiced until later, or when interest has accrued on an investment but has not yet been paid out. While accrued income may seem like a small matter, it can have a significant impact on a business’s financial statements.

Accrued income represents money that has been earned but not yet received, it must also be recognized as income on the company’s income statement. Failure to properly account for accrued income can lead to inaccuracies in financial reporting. For that reason, it is important for businesses to keep careful track of their accrued income and to ensure that it is properly reflected in their financial statements.

A company’s accrual basis of accounting recognizes revenue when it is earned and records expenses when they are incurred, regardless of when the cash is actually received or paid. The matching principle is the underlying rationale for the accrual basis of accounting.

This concept stipulates that expenses should be matched with the revenues they helped generate. In this way, a company’s financial statements more accurately reflect the true profitability of its business activities. The accrual basis of accounting is used by most businesses and is required for companies that report their financial results in the financial statement.

Journal Entry for Accrued Income

The process of recording accrued income is made to follow the matching principle. It aims to match the expense and revenue in the same period.

Sometimes the company has incurred the cost to operate and generate some work done. But they can’t issue the invoice to claim revenue due to the contract term or the nature of the business. It is where the accrued income plays its role.

The company estimates the amount of work performed for the customer and records accrued income.

The journal entry is debiting unbilled receivable and credit accrued income.

Unbilled receivable is the current assets that are similar to accounts receivable. We use this account for controlling purposes and it is present on the balance sheet in the current assets section. Accrued income is the revenue account that separates from the normal revenue account.

At the beginning of the new month, the company needs to reverse transactions. They simply debit accrued income and credit unbilled receivables.

It will be netted off with the revenue below.

When company completes the work and issues an invoice, they have to record actual revenue.

The journal entry is debiting accounts receivable and credit sale revenue.

Example

Company ABC has performed the service for the customer during the month, but it does not yet issue an invoice. The work completed is around $ 5,000 which needs to be accrued on the income statement. The company expects to issue invoices and record revenue at the beginning of next month. Please prepare journal entry for accrued income.

At the end of the month ABC needs to record accrued income to reflect it in the income statement.

The journal entry is debiting unbilled receivables $ 5,000 and accrued income $ 5,000.

At the beginning of the new month, the company reverses the transaction above.

When the company completes the work and issue an invoice, they record the following.

The journal entry is debiting accounts receivable $ 5,000 and credit sale revenue $ 5,000.