Adjusting entry for accrued income/revenue

The term accrued income or accrued revenue refers to such income or revenue 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.

Adjusting entry for accrued income or revenue

In case of accrued revenue:

adjusting-entry-acc-income-img1

In case of accrued income:

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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.

Solution

adjusting-entry-acc-income-img3

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 annum. 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-acc-income-img4

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

The “accrued interest on investment” is an asset that will be shown on the balance sheet under the heading current assets and “interest income” will become a part of the income statement.

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