What is ‘Accrued Income’
Accrued income is earned in a fund or by a company for providing a service or selling a product that has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time but only pay out to shareholders once a year are by definition accruing their income. Individual companies can also accrue income without actually receiving it, which is the basis of the accrual accounting system.
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BREAKING DOWN ‘Accrued Income’
Many employees are paid every two weeks; they do not get paid at the end of each work day. If they leave the company, they are paid for that day of pay because it is earned, but it has not been paid out yet. The income that an employee earns is accrued over a period of time. At the end of the pay cycle, the employee is paid and the accrued amount returns to zero.
Most companies use accrual accounting. It is the alternative to a cash accounting system and a necessary system for companies that sell products to customers on credit. Accrual accounting is based on an accounting convention that seeks to match expenses and sales to the period when they occurred. Just because money has not been received or billed does not mean it has not been earned. Also referred to as accrued revenue, accrued income is often used in the services industry or cases in which customers are billed hourly for work that will be billed in a future accounting period.
Accrual Income Example
For example, assume company A picks up trash for local communities and bills customers at the end of every six-month cycle. Even though company A does not receive payment for six months, the company still records the payment as a debit to accounts receivable. The bill has not been sent out, but the work has been performed and therefore revenue has been earned. So, if a company earns $12 million every six months, but it can only bill its customers twice a year, it accrues $2 million every month for six months in income until the bill is paid.
Accrued Income and Accrued Receivables
It is important to note the difference between accrued income and accrued receivables. Accrued income has not been billed. It is a receivable by definition, so it is listed as a receivable on the balance sheet, but the customer has not received the invoice. Once cash is received, the entry is reversed with a credit, and cash is debited for the amount of incoming cash.