Accrued income is where goods or services have been supplied before a period-end but are invoiced or paid for after the period-end. Where this type of accrual is recorded we will increase the income for the earlier accounting period and create an asset (being the net amount owed for the work done before the period-end). Then an the start of the next accounting period we will reverse the accrual.
As was the case with accrued expenses, accrued income can be recorded with or without using a separate accruals account. We shall look at both methods using the following scenario.
An accountancy practice has a year end of 31st December. On 28th February 2020, the practice invoiced a client £600 plus VAT for preparing the client’s payroll for the period from December 2019 to February 2020.
Of the net amount, £200 relates to the preparation of December’s payroll (calculated as £600 x 1/3). A year-end accrual is therefore required in order to add this amount to the sales for the year ended 31 December 2019.
Recording accrued income using an accruals account
To record accrued income at a period-end we will post a journal that increases income and also creates an asset – in this case, an accrual. The period-end journal for the above scenario is shown below.
The journal would be posted to the ledger accounts as shown below. Note that the journal entries are shown in blue and the other entries recorded in the Sales account reflect the practice’s other sales in the year.
Once the journal has been recorded, the accounts can be closed down for the year. As Sales is an income account its balance will be sent to the Profit & Loss account whilst the accruals account is either an asset or liability account (depending on whether we are recording accrued income or an accrued expense). The journal to move the Sales balance to the Profit & Loss account is as follows:
At the start of new accounting year, the year-end accrual will be reversed. This will cancel the accruals asset and reduce sales for the year (needed in order to ensure that the sales that have been accrued are not double-counted).
The journal to reverse the accrual is shown below.
In due course, the accountancy practice will invoice its client and we the ledger accounts below show how part of the practice’s sales for the year ended 31st December 2020 will be cancelled by the accrual reversal at the start of the year.
Recording accrued income without using an accruals account
Alternatively, rather than a separate accruals account, the year-end accrual can be left in the income account as a balance carried down. If we compare how the Sales Account using this approach (shown below) with how the account is completed when an Accruals Account is used we can see the only difference is that the “31/12/19 Balance c/d” and “01/01/20 Balance b/d” figures shown below have the description Accruals when a separate accruals account is used.