Accrued income is income which has been earned but not yet received.
Income must be recorded in the accounting period in which it is earned. Therefore, accrued income must be recognized in the accounting period in which it arises rather than in the subsequent period in which it will be received.
As income will be credited to record the accrued income, a corresponding receivable must be created to account for the debit side of the transaction. The accounting entry to record accrued income will therefore be as follows:
|
Debit |
Income Receivable (Balance Sheet) |
|
Credit |
Income (Income Statement) |
Example
ABC LTD receives interest of $10,000 on bank deposit for the month of December 2010 on 3rd January 2011. ABC LTD has an accounting year end of 31st December 2010.
ABC LTD will recognize interest income of $10,000 in the financial statements of year 2010 even though it was received in the next accounting period as it relates to the current period. Following accounting entry will need to be recorded to account for the interest income accrued:
|
Debit |
Interest Income Receivable |
$10,000 |
|
Credit |
Interest on Bank Deposit (Income) |
$10,000 |
On the date of receipt of interest (i.e. 3rd January of the next year) following accounting entry will need to be recorded in the subsequent year:
|
Debit |
Bank |
$10,000 |
|
Credit |
Interest Income Receivable |
$10,000 |
Quiz
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Question
ABC LTD has a year end of 31st December 2011. Which of the following transactions and events should result in the recognition of accrued income in ABC LTD’s financial statements?
ABC LTD receives rent income in advance. Rent for the first quarter of 2012 is due on 31st December 2011.
Incorrect.
By definition, accrued income is income that is 'earned' but not yet received. Since the rent in respect of the first quarter of 2012 has not been earned by the year end, it should not be recognized as accrued income.
ABC LTD receives interest on bank deposits on the 5th of the subsequent month. Interest on bank deposit for the month of December 2011 was received on 5th January 2012.
Correct.
Accrued income should be recognized in the financial statements because the interest received on 5th January 2012 relates to income for the year ended 31st December 2011.
ABC LTD sold inventory to a customer on 29th December 2011 on a one month credit period.
Correct.
Income in respect of the sale must be accrued in the 2011 financial statements since the sale had occurred during the current accounting period even though cash inflow will arise in the subsequent period.