Accrued Revenue or Accrued Income

What is Accrued Revenue or Accrued income? – Definition

The term accrued revenue or accrued income refers to such revenue or income for which no cash payment has been received before the end of the period in which the income or revenue in question has been earned. If an income or revenue remains uncollected and no entry has been made in the books of accounts due to any reason, an adjusting entry is required at the end of the accounting period.

This requirement is imposed by the accrual principle that states that the revenues/incomes and expenses must be brought into account in the accounting period in which they are earned or incurred regardless of their receipt or payment.

Accrued revenues are those revenues received for services completed or goods delivered that have not been recorded, necessitating the adjustment of entries and the inclusion of such items as interest revenue and rental revenue.

Explanation

In addition to the profit made on trading activities, a business may occasionally have some other sources of income as well, e.g. rent income, commission income, interest income, etc. Like expenses, most businesses record their incomes only after they have been received in cash. Hence there exists a possibility that at the end of a financial year, a business may have rendered a service for which it may not yet have been paid. The Trial Balance may fail to disclose this accrued revenue or income unless a suitable adjustment is made.

Also Check:  Adjusting entry for accrued/outstanding expenses

Accrued revenues include items such as interest revenue, rental revenue, and investment revenue. Adjusting entries must be made for these items in order to recognize the revenue in the accounting period in which it is earned, even though the receipt of cash will take place in the following periods. Revenues from these items occur continuously but, in order to simplify the process, they are recorded only at the end of the accounting period by recognizing an accrued receivable and a corresponding revenue item.

A firm may have other accrued revenues that require adjusting entries. For example, a company may have earned a commission on the sale of a building in the current period for which it will not receive payment until the next period. in this case, an adjusting entry must be made at the cad of the current period in order to accrue the commission earned but not yet received.

Example

For example, Mr. John, a wholesaler, deposited $200,000 at 6% interest on 1 July 2019 with his bank for a 12 month period. He will, therefore, receive his principal, $200,000 and interest in July 2020. When he draws up his Trial Balance on 31 December 2019, it may not show any record of the interest that has been earned by that date, simply because it has not yet been received in cash by Mr. john.

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But the fact remains that he has already earned six months’ interest by 31 December 2019 and that this income should be reflected in his Profit & Loss Account 2019. Another important fact is, that though his Trial Balance doesn’t disclose it, Mr. John has acquired a current asset, in the form of accrued interest income of $6,000 (6/12th of 6% of $200.000) on 31 December 2019, which must be shown in his Balance Sheet on that date.

Journal Entry for Accrued Income/revenue

The journal entry required to accommodate an accrued income is:

Dr.: Accrued Revenue or Accrued Income Account (a newly opened account)
Cr.: The Relevant Income Account

With the amount of income already earned.

In. Mr. John’s case, the journal entry for accrued revenue or income would be:

Accrued revenue or accrued income - Journal entry

Adjusting entry for accrued income or revenue

In case of accrued revenue:

adjusting-entry-acc-income-img1

In case of accrued income:

adjusting entry for accrued income

Example 1

The Fine Repairing Company provides repairing services valuing $5000 to Monster Company on December 25, 2016. The Monster Company promises to pay the service fee on January 15, 2017. No service revenue has been recorded by the Fine Repairing Company till the end of its accounting period; December 31, 2016.

Make an adjusting entry for this accrued revenue in the books of Fine Repairing Company on December 31, 2016.

Also Check:  Adjusting entry for interest on capital

Solution

adjusting entry for accrued revenue

Example 2

The Small Company makes an investment of $40,000 in Big company on July 1, 2016. This investment earns a 10% interest per anum. The Small company has neither received nor recorded any interest income relating to this investment till the end of its accounting period; December 31, 2016.

Make an adjusting entry in the books of Small Company for this accrued interest on investment in Big Company.

Solution

adjusting-entry-img4

Interest for six months (from July 1 to December 31): ($40,000 × 0.1) × 6/12 = $2,000

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