Accrued income refers to income that has been earned but not yet received. It represents the revenues for goods delivered or services rendered where the payment has not yet been made by the client. This is a fundamental aspect of accrual accounting and ensures that the income is recorded in the period that it was earned, irrespective of whether the cash is received or not.
Imagine you did a job or sold something and the buyer hasn’t paid you yet by the end of the accounting period. Even though you haven’t gotten the money, you still count that expected money as income for that period. It’s like counting the money before it’s in your hand because you’ve already done the work or made the sale.
Accrued income is crucial for businesses for financial reporting and analysis. It helps to provide a more accurate picture of the financial health of the company by recognizing all revenue earned during a period, not just the cash that was received. This is important for assessing a business’s performance and profitability.
For example, A consulting firm completes a project in December but doesn’t receive payment until January. The fee for this project is recorded as accrued income in December. Similarly, A manufacturer delivers products to a retailer at the end of the month, but the invoice is payable in 30 days. The sales value of those products is recognized as accrued income for that month.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy