A financial concept that shows the money that is earned but is not received is called the accrued income. This is a phenomenon in which the company has given their goods and services to their customers, but the accounting department has not revised the payments for these specific services. However, before getting the cash payment, the entries of this payment are mentioned in the balance sheet.

Accrued income is an integral part of financing. If you are not able to understand what accrued income is, then there is no need to worry because this article will help you. Here, we have mentioned a detailed guide through which you will be able to understand the different aspects of this.

What is Accrued Income?

Accrued income is the payment that the company starts to enter when it offers its goods and services to other companies. Even though the company did not receive their payment in cash, they will start mentioning it in their accounting sheets. This is why the accrued income is also called the income earned by or received.

An example that can help you understand this better is when a customer purchases goods or services from a company on account. Purchasing stuff on account means the client is paying through credit. In such cases, the companies know that they are offering goods to their clients, and they are even purchasing the products; however, the company has not received any cash from the clients. The accrued income can also be called as the deferred income.

In the generally accepted accounting principles (GAAP), the accrual income is based on the revenue recognition principle. This means that the company makes the revenue in the period when they are earned and not when the company gets the cash for these purchases.

How to Record Accrued Income?

As the accrued expenses are recorded on the balance sheets, the accrued income is also recorded. The following are some examples that can help you understand how these incomes are recorded.

Example 1:

For example, a company is offering online services to another company on the 1st of March. However, they will not be getting the payments for these services until the 15th of April. This does not mean that the company has not made a profit. The record must be added to the sheets during the accounting period as the services have been provided. Even though the company has not yet received the payment, it is still considered that the deal has been done and completed.

To ensure everything is maintained, the amount will come under the accrued income, and this will be considered as the credit to the income. In order to balance it out, the debit for the same amount will be done to the accounts receivable, and this will balance out the sheets properly.

Example 2:

Another example of accrued income is when Company A makes an investment and earns interest on the investment. Every March and September, the company gets about $1000 of interest. The company had an interesting March. However, they have not receive the complete interest until September. However, the total interest that the company will be making during this time will be considered as the accrued income.

So when the company gets the interest in September, then this means that the entire interest will be earned, and it will be removed from the accrued income.

Benefits of Accrued Income:

There are a lot of different benefits for the accrued income. One of the main benefits is that it helps with the most effective financial monitoring for the company. It also helps the company to have a real-time view of how the companies are making their money and also allows the company to make proper financial reports.

With the help of accrual accounting methods, the organizations will be able to prepare cash flow statements and will also recognize the new trends in the financial sector. This method is also very accurate for showing the finances and how the money is moving in the company. It is also a fantastic strategy through which companies are able to manage their debt, their accounts, their income, and all their other financial activities.

It is seen that the accrual accounting method is fantastic for medium and large-sized businesses as they have more cash flow, and it will help them monitor and track all the critical financial parts of the company.

What is the Importance of Accrued Income?

Now, the last thing you should know is what is the importance of accrued income. A lot of companies work on an advanced basis; this means that they get some amount of money for the work and goods that they are selling to the customers. However, companies need to understand the difference between the revenue that they have earned and the revenue that they will be earning for the services that they have already provided.

If the companies are not able to differentiate between these two things, then there can be an overstatement, and this can affect the company's financial statement. This is why the accrued income helps in tracking your earned revenue and the revenue that the company still has to earn. This avoids any errors in the financial statement, and everything works smoothly in the company.

Conclusion:

There are a lot of different parts and concepts that are used when it comes to financing companies. Among these different concepts, rued income is something that the financing department commonly uses to keep track of the cash flow. This is an important method through which businesses are able to keep track of their revenue and the money they have to make.

Hence, this article had all the information that you needed to understand the intricacies related to this accrued income.