Accrued income

What it means

Accrued income is an accrual item used to record income belonging to the current accounting period even though the money for it arrives only in a later one. In business accounting it is kept on account 385 and shown among assets in the balance sheet as an accrual.

Typical examples are December interest on a deposit credited only in January, rent for the last quarter that the tenant pays in arrears, or royalties invoiced after the year ends. The income has arisen because the service or use has already taken place; only the payment, and sometimes the document, come later.

Accrued income must be distinguished from deferred income. With deferred income the money arrived in advance and the income belongs to the future, such as a subscription for next year. With accrued income it is the other way round: the income belongs to now and the money comes later. Both items have mirror images on the expense side.

How it works in practice

At year-end we go through contracts with regular income and check whether all income for the year has been recorded. If December income has not yet been invoiced or credited, accrued income is booked against the relevant income account. In the following year it is released once payment is received or the invoice issued.

Accrued income is used when the amount of income is known. If the amount is not yet precisely determined, for example an expected supplier bonus, an estimated receivable is used instead. The distinction between these tools follows the accounting procedures and is worth describing in an internal policy.

For small companies it matters that accruals need not be made for immaterial, regularly recurring items if this does not distort the result. The materiality principle decides. For interest on a small deposit accruals are often skipped; for a large royalty they are made.

What to watch out for

The most common mistake is forgetting income invoiced only after year-end. The result is then understated and the income appears in the wrong year. When reviewing the financial statements, auditors look especially at January and February to see whether they contain income belonging to the previous year.

Mind the tax effect too. Income recorded as accrued income enters the tax base in the year it belongs to, not the year of payment. If a company fails to accrue it and taxes the income only on payment, it makes a period error that has to be corrected with a supplementary return.