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ACCA Financial Accounting
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Introduction
1. The context and purpose of financial reporting
2. Accounting principles, concepts and qualitative characteristics
3. Double-entry bookkeeping and accounting systems
4. Recording transactions and events
4.1 Sales, purchases, receivables and payables
4.2 Inventories
4.3 Accounting for non-current asset
4.4 Accruals and prepayments
4.4.1 Accrued expenses
4.4.2 Prepayments
4.4.3 Accrued income
4.4.4 Deferred income
4.5 Provisions and contingencies
4.6 Capital structure and finance costs
4.7 Components of equity
5. Reconciliations
6. Preparing trial balance
7. Preparing financial statements
8. Preparing basic consolidated financial statements
9. Interpretation of financial statements
Wrapping up
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4.4.3 Accrued income
Achievable ACCA Financial Accounting
4. Recording transactions and events
4.4. Accruals and prepayments
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Accrued income

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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 recognize, adjust, and reverse accrued revenue, prepare journal entries, and report their impact on profit and financial position under the matching principle.

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 (or have been issued but payment has not yet been received) as at the end of the accounting period.

Because of the matching 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 is described as accrued income (revenue), and the related receivable is described as an accrued receivable.

Sidenote
Accrued Income: Journal Entries

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

Debit: Accrued receivable

Credit: Accrued income

The accrued income is credited to the statement of profit or loss while the accrued receivable is presented as a current asset on the face of the statement of financial position.

Reversal of accrued income

Accrued income is an estimate made at the end of the accounting period. In the next accounting period, when the actual invoice is sent to the customer, the invoice amount may be equal to, higher than, or lower than the amount you accrued.

  1. Where the actual invoice amount is equal to the accrued income. No adjustment of the initial journal entry for the accrued income would be required.

  2. Where the actual invoice amount is higher than the accrued income. This means the initial accrued income has been understated, so both the income and the asset must both be increased by the difference.** The journal entry to pass the difference would be:**

    Debit: Accrued receivable

    Credit: Revenue or income

  3. Where the actual invoice amount is lower than the accrued income. This means the initial income accrued has been overstated, so both the income and the asset must both be decreased by the difference. The journal entry to pass the difference would be:

    Debit: Revenue or income

    Credit: Accrued receivable

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, Horizon Consulting Services 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.
(spoiler)

Debit: Accrued Receivable $35,500

Credit: Accrued Income (Revenue) $35,500

(Being consulting income earned but not yet invoiced as at Dec 31, 2024)

  1. For each client, identify whether the accrued income was equal to actuals, understated, or overstated. Do you know the answer?
(spoiler)
Facilities Client a Client b Client c
Accrued amount $15,000 $8,500 $12,000
Actual invoice $15,000 $9,200 $11,400
Variance $0 +$700 -$600
Status Equal - No adjustment needed Understated - Need to increase Overstated - Need to decrease
  1. Calculate the total actual revenue earned for the quarter and compare it to the accrued amount. What is the net difference?
(spoiler)

The total accrued income was understated by $100 ($35,600 - $35,500).

  1. Prepare the net adjustment journal entry if the company prefers to record one combined adjustment for all clients. Do you know the answer?
(spoiler)

Debit: Accrued Receivable $100

Credit: Consulting Revenue $100

(Being net adjustment for understatement of accrued income)

  • Record estimated revenue when goods/services are delivered, even if the invoice hasn’t been sent yet (Debit: Accrued Receivable, Credit: Accrued Income).
  • Recognize revenue in the period it is earned, not when cash is received or invoice is issued.
  • When the actual invoice is sent, adjust only the difference - increase if understated, decrease if overstated. One can choose to reverse the total amount accrued and book the actual amount.
  • Accrued income increases profit in the statement of profit or loss; accrued receivable appears as a current asset on the statement of financial position.
  • Accrued income creates an asset (receivable) and increases revenue, opposite to accrued expenses which create a liability (payable) and increase expenses.

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Next  | 4.4.4 Deferred income
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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 recognize, adjust, and reverse accrued revenue, prepare journal entries, and report their impact on profit and financial position under the matching principle.

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 (or have been issued but payment has not yet been received) as at the end of the accounting period.

Because of the matching 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 is described as accrued income (revenue), and the related receivable is described as an accrued receivable.

Sidenote
Accrued Income: Journal Entries

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

Debit: Accrued receivable

Credit: Accrued income

The accrued income is credited to the statement of profit or loss while the accrued receivable is presented as a current asset on the face of the statement of financial position.

Reversal of accrued income

Accrued income is an estimate made at the end of the accounting period. In the next accounting period, when the actual invoice is sent to the customer, the invoice amount may be equal to, higher than, or lower than the amount you accrued.

  1. Where the actual invoice amount is equal to the accrued income. No adjustment of the initial journal entry for the accrued income would be required.

  2. Where the actual invoice amount is higher than the accrued income. This means the initial accrued income has been understated, so both the income and the asset must both be increased by the difference.** The journal entry to pass the difference would be:**

    Debit: Accrued receivable

    Credit: Revenue or income

  3. Where the actual invoice amount is lower than the accrued income. This means the initial income accrued has been overstated, so both the income and the asset must both be decreased by the difference. The journal entry to pass the difference would be:

    Debit: Revenue or income

    Credit: Accrued receivable

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, Horizon Consulting Services 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.
(spoiler)

Debit: Accrued Receivable $35,500

Credit: Accrued Income (Revenue) $35,500

(Being consulting income earned but not yet invoiced as at Dec 31, 2024)

  1. For each client, identify whether the accrued income was equal to actuals, understated, or overstated. Do you know the answer?
(spoiler)
Facilities Client a Client b Client c
Accrued amount $15,000 $8,500 $12,000
Actual invoice $15,000 $9,200 $11,400
Variance $0 +$700 -$600
Status Equal - No adjustment needed Understated - Need to increase Overstated - Need to decrease
  1. Calculate the total actual revenue earned for the quarter and compare it to the accrued amount. What is the net difference?
(spoiler)

The total accrued income was understated by $100 ($35,600 - $35,500).

  1. Prepare the net adjustment journal entry if the company prefers to record one combined adjustment for all clients. Do you know the answer?
(spoiler)

Debit: Accrued Receivable $100

Credit: Consulting Revenue $100

(Being net adjustment for understatement of accrued income)

Key points
  • Record estimated revenue when goods/services are delivered, even if the invoice hasn’t been sent yet (Debit: Accrued Receivable, Credit: Accrued Income).
  • Recognize revenue in the period it is earned, not when cash is received or invoice is issued.
  • When the actual invoice is sent, adjust only the difference - increase if understated, decrease if overstated. One can choose to reverse the total amount accrued and book the actual amount.
  • Accrued income increases profit in the statement of profit or loss; accrued receivable appears as a current asset on the statement of financial position.
  • Accrued income creates an asset (receivable) and increases revenue, opposite to accrued expenses which create a liability (payable) and increase expenses.

More from Accruals and prepayments

  • Accrued expenses
  • Prepayments
  • Deferred income