What is Accrued Income?
(Part 1)

---

Previous lesson: Income: Definition and Examples 
Next lesson: Accrued Income Example Part 2: Debtor Pays Off His Debt

---

What is accrued income?

You might have heard of this term before, but do you really know what it is?

Before we get into the meat of this lesson and a full example, let's clarify its meaning:

In other words, you've provided some goods or services on credit, and another business owes you for that.

Accrued Income and Debtors

Before we go any further, let's go over another key term:

Debtors or accounts receivable is an asset, as you expect to receive benefits from them in the future – you expect to be paid.

The word "receivable" simply means "capable of being received," or "to be received."

Accrued Income Example #1

f) George’s Catering provides catering services for a funeral for the Smiths. The services are provided on the 8th of April and the agreed fee is $5,000. As part of the agreement, the Smiths will only make payment at the end of April.

George’s Catering stood as follows: 

What do we do with our accounting equation on the 8th of April?

Well, before I answer that question we're going to have to look at a very key concept you need to understand - the way we record income and expenses - a concept known as the accrual basis of accounting... 

The Accrual Basis of Accounting

Income and expenses are recorded using the accrual basis of accounting.

Between October and January we record that cash is owed (a debtor is recognized). 

In this case, cash was received the following accounting period (year) in January. In spite of this, we recognize the income this year, when it took place.

The Cash Basis of Accounting

The only other basis on which income and expenses could ever possibly be recorded is the cash basis. According to the cash basis, the income would have been recorded when the cash was finally received in January (the following year). No debtor (a credit item) would ever be recorded anywhere. 

Please note: We do not use the cash basis in accounting.

We use the accrual basis.

Back to Our Accrued Income Example

So, the question still remains to be answered: what do we do with our accounting equation on the 8th of April when the catering services were provided? 

Again, George’s Catering stood at:

The answer is that we do the following:

First of all, the income is recorded straight away on the 8th of April, as the event has taken place - the catering services for the funeral has been provided. The business has made income, and this is worth $5,000.

Income increases on the right side (the same side as the owner’s equity) as it belongs to the owner.

As the $5,000 is not yet received in cash, we record a debtor (the Smiths) on this date. Our assets still go up by $5,000, but this is in the form of debtors - not cash - because this was a credit transaction.

In terms of the accounting equation and financial position of George's Catering (as shown in the diagram above), you can see that the owner now has a stake of $30,000 out of the total assets of $35,000.

So even though no cash was received yet, the income still results in more assets, and in the owner having a greater share of these assets (more owner's equity).

Test Yourself!

Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.

Difficulty Rating:
Beginner

Quiz length: 
4 questions

Time limit:
6 minutes

Important: The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.

Good luck!

This Form cannot be submitted until the missing fields (labelled below in red) have been filled in
Accrued Income Mini Quiz:
Please note that all fields followed by an asterisk must be filled in.
1. True or false: "Accrued" basically means "owed." *
a) True b) False
2. Which of the following statements are true?*
a) Debtors are people that owe your business money. b) Debtors refers to the value of debts to your business as a whole. c) Another name for debtors is accounts receivable. d) Debtors are assets for a business. e) All of the above.
3. True or false: The accrual basis means that income and expenses are recorded in the periods to which they relate, not necessarily when cash is received or paid.*
a) True b) False
4. Which elements of the accounting equation are affected when the business earns income and is not paid immediately?*
a) Assets increase and liabilities increase. b) Assets increase and owner's equity increases. c) Assets decrease and owner's equity increases. d) Assets decrease and owner's equity decreases. e) None of the above.
First Name
E-Mail Address
Country
CountryUnited StatesCanada----------------AfghanistanAlbaniaAlgeriaAmerican SamoaAndorraAngolaAnguillaAntarcticaAntiguaArgentinaArmeniaArubaAustraliaAustriaAzerbaijanBahamasBahrainBangladeshBarbadosBelarusBelgiumBelizeBeninBermudaBhutanBoliviaBosnia and HerzegovinaBotswanaBouvet IslandBrazilBritish Indian Ocean TerritoryBritish Virgin IslandsBruneiBulgariaBurkina FasoBurundiCambodiaCameroonCape VerdeCayman IslandsCentral African RepublicChadChileChinaChristmas IslandCocos IslandsColombiaComorosCongoCook IslandsCosta RicaCroatiaCubaCyprusCzech RepublicDenmarkDjiboutiDominicaDominican RepublicEast TimorEcuadorEgyptEl SalvadorEquatorial GuineaEritreaEstoniaEthiopiaFalkland IslandsFaroe IslandsFijiFinlandFranceFrench GuianaFrench PolynesiaFrench Southern TerritoriesGabonGambiaGeorgiaGermanyGhanaGibraltarGreeceGreenlandGrenadaGrenadaGuamGuatemalaGuineaGuinea-BissauGuyanaHaitiHeard and McDonald IslandsHondurasHong KongHungaryIcelandIndiaIndonesiaIranIraqIrelandIsraelItalyIvory CoastJamaicaJapanJordanKazakhstanKenyaKiribadiNorth KoreaSouth KoreaKuwaitKyrgyzstanLaosLatviaLebanonLesothoLiberiaLibyaLiechtensteinLithuaniaLuxembourgMacaoMacedoniaMadagascarMalawiMalaysiaMaldivesMaliMaltaMarshall IslandsMartiniqueMauritaniaMauritiusMayotteMexicoFederated States of MicronesiaMoldovaMonacoMongoliaMontserratMoroccoMontenegroMozambiqueMyanmarNamibiaNauruNepalNetherlandsNetherlands AntillesNew CaledoniaNew ZealandNicaraguaNigerNigeriaNiueNorfolk IslandNorthern Mariana IslandsNorwayOmanPakistanPalauPanamaPapua New GuineaParaguayPeruPhilippinesPitcairn IslandPolandPortugalPuerto RicoQatarReunionRomaniaRussiaRwandaS. Georgia and S. Sandwich Isls.Saint Kitts and NevisSaint LuciaSaint Vincent and the GrenadinesSamoaSan MarinoSao Tome and PrincipeSaudi ArabiaSenegalSerbiaSeychellesSierra LeoneSingaporeSlovakiaSloveniaSolomon IslandsSomaliaSouth AfricaSpainSri LankaSt. HelenaSt. Pierre and MiquelonSudanSurinameSvalbardSwazilandSwedenSwitzerlandSyriaTaiwanTajikistanTanzaniaThailandTogoTokelauTongaTrinidad and TobagoTunisiaTurkeyTurkmenistanTurks and Caicos IslandsTuvaluU.S. Minor Outlying IslandsUgandaUkraineUnited Arab EmiratesUnited KingdomUruguayUzbekistanVanuatuVatican CityVenezuelaVietnamUS Virgin IslandsWallis and Futuna IslandsWestern SaharaYemenYugoslavia (former)ZaireZambiaZimbabwe
	Subscribe to Newsletter
Please enter the word that you see below.

Well done on completing this first tutorial on Accrued Income, hopefully you can now confidently answer the question: "What is Accrued Income?"

In our next lesson, part 2 on Accrued Income, we'll go over the second example relating to the funeral services that were provided - recording the payment from the debtor at the end of the month.

By the way, if you've been going through our lessons in order, this one is by far the most difficult so far. So if you're not feeling 100% yet, don't worry.

IMPORTANT: Do not move forward if you're confused. Instead, take a step back to the previous lesson entitled Income: Definition and Examples and go over the examples in it. When you're happy with that lesson, return to this one and check it over again. If you're still having trouble, return to earlier lessons you didn't feel good about, even the lessons in Basic Accounting Concepts. See if you can spot anything you didn't quite get the first time.

Once you're relatively comfortable with this lesson and the concept of accrued income, feel free to move ahead.

Return to Basic Accounting Transactions 

Return to the Home Page 

Stay up to date with ABfS!
Follow us on Facebook:

---

Previous lesson: Income: Definition and Examples 
Next lesson: Accrued Income Example Part 2: Debtor Pays Off His Debt

---

---

---

© Copyright 2009-2023 Michael Celender. All Rights Reserved. 
Click here for Privacy Policy.

Search this site:

Stay up to date with ABfS!
Follow us on Facebook:

All the lessons on this site and much, much more...

Available Now On