Accrued income has been gained but has yet to be received. Mutual funds or other merged assets that acquire income over some time but only payout to investors once a year are by definition accumulating their profit. Individual firms can also accrue income without actually receiving it, which is the basis of the accrual accounting system.
Understanding Accrued Income
Most businesses use accrual accounting. It is the other option to a cash accounting strategy, and it is necessary for firms that trade products or give services to customers on credit. Under the U.S. GAAP, accrual accounting is situated on the revenue recognition principle that seeks to match revenues to the time in which they were profited, rather than the time in which cash is received. In short, just because money has not yet received does not mean that revenue has not been gained.
The matching principles needs that revenue be recognized in the same time as the expenses that were used in earning that revenue. Also, referred to as secured revenue, accrued income is usually used in the service industry or cases in which consumers are charged an hourly rate for work that has been finished but will be billed in the next accounting period. Accrued income is filed in the asset section of the balance sheet since it represents a future benefit to the firm in the form of a future cash payout.
In 2014, the Financial Accounting Standards Board introduced Accounting Standards Code Topic 606 Revenue from Contracts with Customers, to give an industry-neutral revenue recognition model to raise financial statement comparability across firms and industries. Public firms had to apply the new revenue recognition rules for quarterly forecasts starting in Q1 2018 and for the year ending December 31, 2018.
Accrued Income Examples
Assume business A picks up trash for local communities and costs its customers $300 at the end of every six months. Although business A does not receive compensation for six months, the company still notes a $50 debit to accrued income and a $50 debt to revenue monthly. The bill has not been addressed, but the work has been done, and therefore, expenses have already been acquired and revenue gained.
When cash is accepted for the service at the end of six months, a $300 credit in the cost of the full payment is made to accrued income, and a $300 debit is created to cash. The equity in accrued income returns to zero for that consumer.
Also, accrued income applies to individuals and their paychecks. The income that an employee earns often accrues over some time. For instance, many salaried workers are paid by their firm every two weeks; they do not get paid at the end of each day. At the end of the salary cycle, the employee is paid, and the accrued amount returns to zero. If they leave the firm, they still have salary that has been gained, but it has not been disbursed yet.