Accrued income

Accrued income ensures revenue is recorded when it’s earned, even if it hasn’t yet been invoiced or received. This chapter explains how to recognise, adjust, and reverse accrued revenue, prepare journal entries, and report their impact on profit and financial position under the accruals concept.

Learning objectives

By the end of this chapter, you should be able to:

• Apply accrual accounting to accrued income.
• Calculate the adjustments needed for accrued income when preparing financial statements.
• Illustrate the process of adjusting for accrued income when preparing financial statements.
• Prepare manual journal entries and update the general ledger accounts for the creation and reversal of accrued income.
• Identify the impact of accrued income on profit and net assets.
• Report accrued income in the financial statements.

Definitions

Accrued income or revenue

These are expected receivables from customers for goods delivered or services rendered during an accounting period, for which invoices have not yet been issued to the customer as at the end of the accounting period. Once the invoice is issued, the amount becomes a trade receivable instead.

Because of the accruals concept, you record income in the period it’s earned, even if the invoice hasn’t been sent yet. That means the firm may need to estimate the amount it expects to invoice the customer.

When you make this estimate:

• You record the amount as income (because it has been earned).
• You also record the same amount as an asset (because the customer owes the business).

The income and the related asset are both described as accrued income.

Sidenote

Accrued income: journal entries

The accrued income, when computed, is recorded in the general ledger using the journal entry:

Debit: Accrued income

Credit: Revenue

Revenue is increased in the statement of profit or loss, and accrued income is shown as a current asset in the statement of financial position - the opposite of deferred income, a current liability for cash received before it’s earned (covered in the next chapter).

Recording accrued income therefore increases both profit and net assets by the same amount; omitting it understates both.

Reversal of accrued income

Accrued income is an estimate made at the end of the accounting period. In the next period, it’s dealt with in three steps:

1. At the year end, set up the closing accrued income: debit accrued income and credit revenue, as above.

2. At the start of the next period, bring the accrued income down as an opening balance on the debit side of the revenue account. This reverses it:

   Debit: Revenue

   Credit: Accrued income

3. When the invoice is issued, record it in full, like any other sale on credit. The amount is now a trade receivable:

   Debit: Trade receivables

   Credit: Revenue

The opening debit and the full invoice net off, so only the difference between the invoice and the estimate is left in the new period’s revenue. You don’t need a separate entry for the difference. If the estimate was too low, the shortfall adds to the new period’s revenue; if it was too high, the excess reduces it. The previous period’s figures aren’t changed.

So the income for the year is:

$$\text{Income for the year}=\text{Received}-\text{Opening accrued income}+\text{Closing accrued income}$$

Illustrations: accrued income

JB Consults prepares its financial statements annually on December 31st. The company provides consulting services to various clients on ongoing contracts.

On December 31, 2024, JB Consults had completed work for several clients but had not yet issued invoices for services rendered during the final quarter of 2024. The company’s policy is to invoice clients at the beginning of the following month after service completion.

	Client A	Client B	Client C
Services rendered	October - December 2024	November - December 2024	December 2024
Estimated invoice value	$15,000	$8,500	$12,000
Actual invoice	$15,000 (sent on January 5, 2025)	$9,200 (sent on January 10, 2025)	$11,400 (sent on January 8, 2025)

Answer each of the questions below based on the preamble.

1. Prepare the initial accrual journal entry recorded on December 31, 2024, for all clients combined.

Solution:

2. Prepare the entry made on January 1, 2025, to reverse the accrued income.

Solution:

3. The invoices are sent in January 2025. Prepare the entry that records them, and compare them with the accrued income.

Solution:

4. What is the net effect of the reversal and the invoices on 2025 revenue?

Solution: