To illustrate, let's assume that a company invested $100,000 on December 1 in a 6% $100,000 bond that pays $3,000 of interest on each June 1 and December 1. On December 31, the company will have earned one month's interest amounting to $500 ($100,000 x 6% per year x 1/12 of a year, or 1/6 of the semiannual $3,000). No interest will be received in December since it will be part of the $3,000 to be received on June 1. The $500 of interest earned during December, but not yet received or recorded as of December 31 is known as accrued income.
Under the accrual basis of accounting, accrued income is recorded with an adjusting entry prior to issuing the financial statements. In our example, there will need to be an adjusting entry dated December 31 that debits Interest Receivable (a balance sheet account) for $500, and credits Interest Income (an income statement account) for $500.
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