Accrued Income

Accrued Income – The Core Idea

Income is recorded when it is earned, not necessarily when cash is received. If you have provided a service or lent money during the current year, and the payment for that is due but still unpaid at the year-end, that income is accrued income. It is an asset because you have a legal claim to receive that cash in the future.

Common examples are interest on a loan that is due but not yet paid, rent that has fallen due but the tenant hasn't paid, or commission earned on a sale that will be collected next year.

The Adjusting Entry

The rule is simple: you must recognise the income in the current year's Profit & Loss Account, and you must record the asset (the amount receivable) on the Balance Sheet. The journal entry is:

Why this entry?

• Debit Accrued Income A/c – because an asset is being created (the right to receive money).
• Credit the Income A/c – because the income has been earned, increasing the revenue for the year.

Effect on the Financial Statements

1. Profit & Loss Account – The amount of accrued income is added to the related income head on the credit side. This increases the total revenue and therefore the net profit.
2. Balance Sheet – The Accrued Income account appears on the Assets side under Current Assets (since it is expected to be received within the next accounting period).

Worked Example from the Textbook

Ankit has a trial balance showing Commission Received of ₹5,000. At year-end, he finds that a further ₹1,500 of commission has been earned but not yet received. The total commission earned for the year is ₹5,000 + ₹1,500 = ₹6,500.

Adjusting Entry:

Profit & Loss Account (extract):

Notice that the net profit increased by ₹1,500 because of this adjustment.

Balance Sheet (extract – Assets side):