Accrued Income Journal Entry: Meaning, Importance, and Examples

Accrued income refers to an income that is earned but not yet received. Continue reading to understand the meaning and importance of accrued income as well as the accrued income journal entry. 

What is Accrued Income

Accrued income refers to the revenue that a company has earned by providing goods or services but for which payment is pending. In accounting, this income is booked as an asset because it is essentially money that a company is entitled to receive. 

Key Features of accrued income:

• Revenue Recognition: Accrued income is a perfect example of the revenue recognition principle, which states that income should be recognised when earned, not when payment is received.
• Current Asset: Until it is paid, accrued income is recorded as a current asset on the balance sheet.
• Cash Flow Timing: The revenue has been earned but not yet received in cash, leading to a timing difference between the company’s income statement and cash flow statement. 

When is Accrued Income Recorded 

Accrued revenue is typically recorded at the end of an accounting period, which can be monthly, quarterly, or annually, based on business size and income type. For example:

• Consultancy Services: A consultancy in Mumbai would record income as ‘accrued’ if services are provided in March but payment isn't received by the fiscal year-end on 31st March.
• Interest Income: Accrued interest income is recorded at the quarter-end for unpaid days in that quarter.
• Rent Income: Unreceived March rent would be counted as accrued income at fiscal year-end.
• Long-Term Contracts: Income may be accrued at different milestones as per Ind AS 11 or Ind AS 115.
• Foreign Transactions: Guidelines may also account for foreign exchange rate effects, per Ind AS 21.

How is Accrued Income Recorded

Accrued income is accounted for when services are provided or goods delivered, but payment is pending. It requires adjusting journal entries to be passed under the double-entry bookkeeping system. The asset account for accrued revenue will be debited, and the revenue account will be credited.

Let’s consider an example where a company provides consulting services worth ₹50,000 but hasn’t yet received payment from the client. The accrued income journal entry would look like this:

Journal Entry Format:

Steps to Record:

• Debit the Asset Account: The asset account, generally called ‘Accrued Income’, is debited to increase its value. In this example, accrued Income is debited by ₹50,000.
• Credit the Income Account: Correspondingly, the income account, say ‘Consulting Revenue’, is credited to indicate that the income has been recognised. Here, consulting revenue will be credited by ₹50,000.

The exercise aligns with the dual-entry system of accounting and ensures that the accounting equation stays balanced.

Importance of Recording Accrued Income

The importance of recording accrued income cannot be overstressed. It goes beyond just logging numbers into a ledger and enables both financial transparency and planning in an enterprise.

• Financial Transparency: Accurate reporting of accrued income provides a clearer picture of a company's financial health.
• Cash Flow Planning: Knowing your accrued income can assist in better cash flow management and projections.
• Tax Implications: For businesses in India, where the tax structure can be complex, and taxes are required to be paid on accrued income, recording accrued income correctly can have significant implications for accurate income tax and GST filings.
• Investor and Stakeholder Confidence: Inconsistencies in income recognition can ring alarm bells for stakeholders. Accurate accrual accounting fosters trust.

Journal Entry for Accrued Income

If accrued income is the event, then the accrued income journal entry is the snapshot that captures it in the accounting records.

Standard Journal Entry for Accrued Income:

In this entry:

• Debit: The accrued income account is debited to increase your assets.
• Credit: Your revenue account is credited to indicate that income has been earned.

Reversal of Accrued Income

Reversal of accrued income is as crucial as its recording. When the actual payment is received, it becomes necessary to reverse the accrued income to avoid double counting.

Reversal Journal Entry:

In this entry:

• Debit:  The cash or bank account is debited, showing an inflow of cash. 
• Credit: The accrued income account is credited, showing a decrease in assets.

Accrued Income Journal Entry Example

Let's assume you are running a software consultancy company based in India. You’ve worked on a project for a client during the month but haven't yet invoiced them. The project is worth ₹200,000.

Journal Entry for Accrued Income:

Now, fast forward to the next month when you receive the payment.

Reversal Entry Upon Payment:

It’s essential to reverse the accrued income entry to reduce the asset balance held in the balance sheet and reflect the cash received. 

Frequently Asked Questions 

Why is recording of accrued income important?

Recording accrued income is crucial for showing the true financial position of a business. It helps maintain accurate accounting records, which are vital for stakeholders' assessments and making informed financial decisions. It also enables the filing of accurate tax returns, as Indian tax laws require taxes to be paid on accrued income.

How is accrued income different from deferred revenue?

While accrued income represents revenue earned but not yet received, deferred revenue is the opposite. Deferred revenue is money received for services or goods that have not yet been delivered. Both are important for accurate accounting but serve opposite roles.

Is accrued income a current asset?

Accrued income is generally considered a current asset and is included in the balance sheet. This categorisation indicates that the business expects to receive payment within a short period, typically within a year.

When should accrued income be reversed?

Accrued income entries should be reversed when the payment is received or if an error was made in recording it. Reversing the entry maintains the accuracy of the financial records.

What is the journal entry for accrued income?

The journal entry for accrued income typically involves a debit to the accrued income account and a credit to the relevant revenue account. This ensures that the revenue is recognised even if payment is pending, keeping accounting records accurate.

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