Accrued income is earnings from investments that have not yet been received by the investing entity, and to which the investing entity is entitled. This concept is used under the accrual basis of accounting.
The investing entity should accrue its best estimate of the income in the accounting period in which it earns the income. It may not be necessary to generate this accrual if the amount is immaterial, since the resulting accrual would have no demonstrable impact on the financial statements.
A business operating under the cash basis of accounting would not record accrued income, since it would only record income upon the receipt of cash. This usually delays the recognition of income.
The accrued income term is sometimes also applied to revenue for which an entity has not yet issued a billing, and for which it has not yet been paid. This is a common occurrence in the services industry, where a project may involve billable services for several months, with an invoice only being issued at the end of the project. In this scenario, the concept is more commonly referred to as accrued revenue.
For example, ABC Company earns $500 of interest during May on an investment in a bond that will only be paid by the bond issuer at the end of the year. In May, ABC records this entry:
|Accrued interest income||500|
At the end of the year, when the cash payment arrives from the bond issuer, ABC eliminates the entire amount of the interest receivable with a credit, and debits cash for the offsetting amount of cash payment from the issuer.