Definition of Accrued Income
Accrued income is an amount that:
- A company has earned
- The company has a right to receive
- The collection is probable
- Has not yet been recorded in the general ledger accounts
Under the accrual basis of accounting, accrued income is recorded with an accrual adjusting entry prior to issuing the financial statements.
Example of Accrued Income
One example of accrued income is the interest a company earns on a bond investment. 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 included in the $3,000 interest that will be received on June 1. The $500 of interest that has been earned during December, but not yet received nor previously recorded as of December 31, is accrued interest income.
The accrued interest income will be recorded with an accrual 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.
