Accrued Income
Candlefocus EditorAccrual accounting is one of the main ways to book business transactions and is used for businesses to report their financial performance for a given period. This includes all processes of assigning income to the time period when it's earned, so businesses don't have to wait until it's actually received.
Accrued income is recorded on the books differently than income that has been collected. When earned, income is recorded as either a credit to the “accrued income” account or a debit to the “accrued expenses” account with a corresponding credit to the income account. The accumulation of all the debits and credits at the fiscal year-end will result in either an accrued income or an accrued expense.
In the case of an accrued income, the sum of all the income accounts with a credit balance will be added to the “accrued income” account. This account reflects the amount of income that has been earned during the period, but not yet received.
For individuals, earned income such as a salary or wages is often considered to be received on the last day of the accounting period, or when it is available to the individual or business. Any unpaid earnings are accrued as income for the accounting period and will appear on the balance sheet.
By recording any revenue as it is earned instead of when received, businesses have a better understanding of the cash flow situation. This is because businesses can recognize expenses as well as revenue that have been incurred even if they have yet to be paid out. It also means that businesses are not penalized for any earned income that they may not have received yet.
At the end of the accounting period, any income that was not paid out to the entity that earned it needs to be accounted for as it is vital for the preparation of a complete financial report. Accrued income needs to be included in any financial documents as it can give an accurate representation of how well the business is doing as it reflects all the income that has been earned during that period.
Accrued income is a key concept to understand when it comes to accounting. It helps businesses and individuals gain a better understanding of their overall financial situation and accurately record the income generated during a given period. By recognizing any income or expense as soon as it is earned or incurred, businesses can better forecast their future financial performance.