Accrued Income: Money Earned But Not Yet Received
Accrued income is money that has been earned but not yet received. This type of income is also referred to as accrual income or revenue, and it is one of the most important concepts for businesses to understand when preparing financial statements. Accrued income is typically earned through the sale of products or services, but it can also come from investments, interest payments, and other sources.
Accrued income is important to businesses and individuals because it represents money that is owed to the entity. This money is not yet "in the bank", so it is not included in the cash balance when preparing financial statements. Accrued income must be recorded in the company's books and accounted for in the income statement to ensure that it is recognized as income and not expenses.
When it comes to businesses, accrued income can have a significant impact on their financial standing. Accrued income is not just money that has been earned but not yet received; it is also money that is owed to the business. This means that if a business does not account for its accrued income, it could end up with a reduced or inaccurate net income. This, in turn, could lead to inaccurate financial statements and a lower credit rating.
Importance of Accrued Income
Accrued income is important to companies because it helps them understand their total income and accurately calculate their bottom line. For example, a company may have earned income from the sale of goods or services, but the money has not yet been received. In this case, the company would still need to include this income in its financial statements, as it has been earned, even if it has yet to be collected. This provides a more accurate picture of the company's finances.
Accrued income is also important to individuals, as it helps them understand their total income for tax purposes. For example, if an individual has earned income from a job but has yet to receive the money, they are still required to report it to the Internal Revenue Service (IRS). This ensures that the individual pays the correct amount of taxes and avoids penalties.
Accrued income is an important concept to understand when it comes to financial planning. It is important to keep track of all income that has been earned but not yet received and to ensure that it is properly accounted for. Accrued income should also be included in any financial statements, as it is considered to be part of a company's or individual's net worth.
Accrued income is also important for taxes. Accrued income is subject to income tax, so companies need to make sure that they are aware of their accrued income when filing their taxes. It is important to note that the cash received may be different than the amount of accrued income that was recorded.
Accrued income is also important when it comes to budgeting. Accrued income provides a better understanding of future income and cash flow, which can help individuals plan for upcoming expenses and investments. This helps prevent individuals from overspending or incurring debt.
Finally, accrued income is important for businesses that are looking to take out a loan. Banks and other lenders will use accrued income as a factor when determining loan eligibility, as it provides an indication of the borrower's ability to repay the loan.
In summary, accrued income is an important concept in the financial world. It is important to businesses, individuals, and lenders, as it provides a measure of the value of goods or services to be received in the future. Accrued income also helps individuals budget and plan for upcoming expenses, and lenders consider it when determining loan eligibility.
Examples of Accrued Income
Given below are a few examples of accrued income:
Here is an example of accrued revenue earned through services:
RQ Ltd. collects and recycles products made of plastic for local communities in the city and charges each of its clients ?6000 every six months. Despite not receiving payment for six months, RQ Ltd records a ?1000 debit to accumulated income and a ?1000 credit to revenue each month.
Although RQ has not yet billed its customers, it has completed the work, and it reflects the total expenses and income earned. When a customer pays for the service in cash after six months, a ?6000 credit applies to accrued revenue, and a ?6000 debit applies to cash. For the consumer, the balance of accrued revenue now becomes zero.
Here is a hypothetical example of accrued revenue earned as interest from investments:
Company 'Go' invested ?10,00,000 in bonds on March 1st with a rate of interest of 8%, paid quarterly. The firm in which the Company Go invested pays ? 20,000 in quarterly interest to the company, which falls on 30th June, 30th September, 31st December, and 31st March. As it was the first month, the company did not get the interest of ?6667 (?20,000÷3) outstanding on March 31st.
As the firm understands that interest for March is due, it is going to pay the company 'Go' in the next quarter. Company Go receives the interest amount on June 30th. The amount of ?6,667.00 is the accrued earnings for the Company until June 30th.
Below is an example of accrued revenue earned as EMI:
Deluxe Ltd, a car company, is promoting a luxury vehicle. The company is offering many schemes for its target demographic to increase sales of the new car and attract customers. One such offer is the equated monthly installment (EMI). This way, potential customers can buy luxury cars according to their finances. Deluxe Ltd can charge its customers zero interest with this installment scheme. The revenue that is generated by selling the car on EMI is the accrued income that it will receive continuously for a fixed period of time.
Find below an example of accrued revenue earned by leasing machinery:
When private airplane owners do not use their aircraft regularly, they may frequently lease them out on the contract to earn some money. They can either dry-lease or wet-lease the planes. Dry leasing, often more popular, refers to renting an aircraft without pilots, cabin crew, maintenance, or insurance for a longer time. A wet-leasing agreement offers these conveniences, though for a shorter period. In any case, it helps the aircraft owner earn accrued revenue.
Find below an example of accrued revenue when customers purchase something on account:
Customers who purchase products on account or pay for services on account are two examples of when the transaction occurs prior to receipt of actual payment in cash. Customers make purchases on account, which means they do so on credit. Even if they do not receive any money yet, businesses acknowledge that they are selling items or providing a service in these scenarios. In such cases, businesses typically accrue this income. One general example of this is when people buy groceries from the local grocery shop and pay for them later, generally weekly or monthly.
Here is an example of income earned through an insurance policy:
When an individual buys an insurance policy, he generally needs to pay a fixed amount as the premium every year for some years. When the maturity term is over, the policyholder or beneficiaries can claim the sum assured or maturity value, which is the money promised on the maturity of the policy. This is income that accumulates over the years and accrues during the scheme period.
Below is an example of income earned (accrued income) through fixed deposit payouts:
When one invests in a fixed deposit account, they can earn an amount of interest based on the amount they deposited as per the prevalent fixed deposit (FD) interest rates. This amount adds to the savings over time. The investor might receive the money at maturity if the FD is cumulative, that is, compounded annually. They can also choose to invest in a non-cumulative FD and get payouts monthly. In both cases, the amount is an accrued source of income.
Entry of Accrued Income in Books of Account
Here is an example to understand bookkeeping for accrued revenue:
The interest a firm earns on investment is another form of accruing revenue. Consider the case of SmartMoney Pvt. Ltd., which invests an amount on March 1st. In consecutive half-yearly cycles, i.e., on every 1st March and 1st September, this investment pays ?2,000 in interest. SmartMoney has earned one month's worth of interest on its investments as of the end of March, but it cannot get paid again until September 1st. Accrued interest income here is the amount of interest earned but not collected by SmartMoney at the end of March, which is about ?333 (every month).
In this case, there will be a ?333 credit to the 'interest income' account and a ?333 debit to the 'interest receivables' account as the adjusted record in the balance sheet.