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Accrued Income: Understanding the Concept & Advantages

Accrued Income: Understanding the Concept & Advantages

The money that a company or an individual generates through their regular operations but has not yet been paid or billed is referred to as accrued income. It uses the accrual accounting system, which dates revenues and expenses to the exact moment they occur and is shown as an asset on the balance sheet. A few examples of accumulated income are rental income from renters, interest income from investments, and income from rendered but unbilled services.


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Understanding Accrued Income

According to the matching hypothesis, income must be taken within the same time frame as the expenses incurred to obtain the funds. Sometimes referred to as accrued revenue, accrued revenue is also utilised in the service industry or when customers are paid an hourly rate for work completed but not yet invoiced for a later accounting period. Since accrued revenue offers the company the possibility of a cash payment, it is included in the asset portion of the balance sheet.

Here are a few examples of accrued income:

  • Goods that are delivered to a customer but are not yet billed or paid for.

  • Services rendered to a client but not yet billed or paid for. 

  • Interest accrued on bonds or loans for which the issuer or borrower has not made payments. 

  • Earned rent on a property that hasn't been reimbursed to the renter yet. 

Let us explain a specific instance. Assume that Company A collects trash for nearby towns once every six months and invoices its clients Rs. 300. Despite not being paid for six months, Company A continues to record a monthly debit of Rs. 50 from accumulated profit and a credit of Rs. 50 from revenue. Although the job was completed, expenditures and revenue had already been incurred, even though the bill was not sent out. At the end of the six-month period, when the service is paid for in full, a Rs. 300 debit is made from cash and an additional Rs. 300 credit is applied to defer income. The difference in the total sales for that customer is zero. 

Features of Accrued Income

  • Current Asset: Accrued revenue is shown on the balance sheet as a current asset until it is paid.

  • Revenue Recognition: The revenue recognition concept, which argues that money should be recorded when earned rather than when payment is received, is best shown by accrued income. 

  • Cash Flow Timing: The Company’s income statement and cash flow statement show a different timing as the revenue has been earned but not yet received in cash. 

Journal Entry for Accrued Income 

When items are supplied or services rendered but payment is not yet received, this is recorded as accrued income. To use the double-entry bookkeeping system, journal entries must be adjusted. The revenue account will be credited and the asset account for accrued revenue will be debited. 


Debit (INR)

Credit (INR)

Accrued Income



To Revenue Account



Within this entry: 

  • Debit: In order to enhance your assets, the accrued income account is debited. 

  • Credit: To show that money has been received, your revenue account is credited.

The exercise guarantees that the accounting equation remains balanced and is consistent with the dual-entry accounting system. 

Reverse Journal Entry for Accrued Income

Accrued income’s reversal is just as important as recording it in the first place. To prevent double counting, the accrued income must be reversed when the real payment is received.

Reverse Journal Entry for Accrued Income

Within this entry: 

  • Debit: A cash influx is indicated by a debit to the bank account or cash. 

  • Credit: A decline in assets is indicated by a credit to the accrued income account.

Significance of Recording Accrued Income

It is crucial to record accrued revenue; this cannot be emphasised enough. It allows for more than just entering data into a ledger; it also makes financial transparency and planning possible for businesses. 

  • Financial Transparency: A clearer picture of a company's financial health is provided by accurate accrued income reporting. 

  • Cash Flow Planning: Accrued income information can help with more accurate cash flow estimates and management. 

  • Tax Implications: Accurately documenting accumulated income can have a substantial impact on proper income tax and GST filings for firms in India, where the tax system can be complicated and taxes are due on accrued income. 

  • Confidence among investors and stakeholders: Variations in income recognition may cause investors and stakeholders to become concerned. Trust is fostered by accurate accrual accounting. 

When Should Accrued Income be Recorded?

Depending on the size of the firm and the type of income, accrued revenue is usually recorded at the end of an accounting period, which can be monthly, quarterly, or annually. As an illustration: 

  • Interest Income: For days that were not paid throughout the quarter, accrued interest income is recorded at the end of the quarter. 

  • Rent Income: At the end of the financial year, unpaid rent for March would be included in the total income. 

  • Consultancy Services: If services are rendered in March but payment is not received by the fiscal year's end on March 31st, then a Mumbai-based consultancy would record income as "accrued." 

  • Long-Term Contracts: According to Ind AS 11 or Ind AS 115, income may be accumulated at certain milestones. 

  • Foreign Transactions: According to Ind AS 21, guidelines may also take the effects of exchange rates into consideration.


In conclusion, earned revenue that has not yet been paid is represented as accumulated income, a crucial accounting concept. It can be used to assess a company's financial health and is included as an asset on the balance sheet. A substantial amount of a company's earnings may come from accrued income, which is recognised using either cash-based or accrual-based accounting. Accrued income must be properly accounted for by businesses to manage their finances and make growth plans.


Q1. What is accrued income?

Income that has been earned but not yet received is referred to as accrued income. This can include dividends, rent, royalties, interest on investments, and other revenue streams.

Q2. Why is accrued income important?

Since accumulated income can account for a sizeable amount of a company's earnings, it is crucial to them. Accrued income must be properly accounted for for businesses to manage their finances and make growth plans.

Q3. How do you have to record accrued income in financial statements?

Usually, accrued revenue is listed as an asset on a business's balance sheet. This indicates that the business is due money but has not yet received it.

Q4. Why should you record accrued income?

To accurately depict a company's financial situation, accrued income must be recorded. It supports the upkeep of accurate accounting records, which are essential for the evaluations of stakeholders and the formulation of wise financial judgments. Because taxes on accrued income must be paid under Indian tax regulations, it also makes it possible to file proper tax returns

Q5. How does accrued income differ from deferred revenue?

Deferred revenue is the opposite of accrued income, which is revenue earned but not yet received. Money received for goods or services that have not yet been delivered is known as deferred revenue. Although they have different functions, both are crucial for correct accounting.

Q6. Is accrued income an asset or a liability?

Accrued income is shown on the balance sheet and is typically regarded as a current asset. This classification suggests that the company anticipates payment in a short amount of time, usually less than a year.

Q7. What is the journal entry for accrued income?

Generally, a debit is made to the accumulated income account and a credit is made to the appropriate revenue account in the journal entry for accrued income. This maintains correct accounting records by guaranteeing that income is recognised even in cases where payment is not received.

Q8. When should accrued income be reversed?

When the payment is received or if there was a mistake in the recording, accrued income entries need to be corrected. Reversing the entry preserves the financial records' accuracy.

Q9. Can accrued income be used to pay bills?

A corporation may have accrued income on its books but not necessarily have the cash on hand to pay its payments because accrued income and cash are not the same thing. However, once acquired, accrued money might be invested in new ventures or utilised to assist pay off debt.

Q10. How does cash basis accounting differ from accrual basis accounting?

In contrast to accrual basis accounting, which recognises income whenever it is earned regardless of when cash is received, cash basis accounting only recognises income when cash is received. Accrued income is tracked as an asset when it is earned and recognised as revenue when it is received in accrual basis accounting.

Q11. How does accrued income affect financial statements and profitability analysis?

Accrued income is reported on the income statement as revenue, even though it has not been received in cash. This inflates the revenue figure, potentially giving a more optimistic view of a company's financial performance. It also impacts profitability ratios, such as the profit margin, by increasing reported earnings without a corresponding increase in cash flow.

Q12 . Are there any regulations or standards governing the recognition of accrued income?

Yes, generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) provide guidelines for recognizing accrued income. Accrual accounting requires income to be recognized when it is earned, regardless of when cash is received.

Q13. Can accrued income be reversed or adjusted in subsequent accounting periods?

Yes, accrued income can be reversed or adjusted in subsequent periods if it is determined that the income will not be collected. This adjustment ensures that financial statements accurately reflect the current financial position and performance of the company.

Q14. What are the challenges associated with estimating and calculating accrued income accurately?

Estimating accrued income can be challenging because it requires making assumptions about future cash inflows. Additionally, determining the timing and amount of accrued income may involve judgment calls, which can vary among accountants or management teams.

Q15. How does accrued income impact cash flow management and budgeting decisions?

Accrued income represents revenue that has been earned but not yet received in cash, so it may not immediately impact cash flow. However, it affects budgeting decisions by influencing revenue projections and can impact cash flow when the accrued income is eventually collected.

Q16. Are there specific industries or sectors where accrued income plays a significant role?

Accrued income is common in industries with long-term contracts or service agreements, such as construction, consulting, and subscription-based businesses. It is also prevalent in financial services, where interest and dividend income may be accrued before payment.

Q17. How can investors rely on accrued income to assess a company’s financial health?

Accrued income serves as a valuable tool for investors to assess a company's financial standing and prospects for expansion in the future. Even though cash is not readily available, a corporation with a sizable quantity of accumulated income may imply excellent earnings potential and continuous revenue sources. When assessing a company's financial health, investors should also take other aspects like debt levels and overall profitability into account.

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