Accounting is considered the backbone of a business. It is the record keeper of almost everything that matters to the company. There are so many ways that it can help the company to track down its progress.
From conception to an outcome, success or failure, movements in business are reported through accounting. It doesn’t just secure your finances; it will also help in improving them. However, there are still a lot of parts that can be quite confusing for someone who is not dedicated to the field. In this case, accrued income can mean a lot of things.
Defining Accrued Income
Let us first start with an example. You may have rendered a service to another company, like a writing gig. You were tasked with write about that particular company, reviewing their products and the like. Most of the time, these gigs would be paid immediately after the service was completed.
It can be through cash or other means, but it doesn’t matter as long as the payment was made. If you were doing the accounting, then you would receive this as cash on the debit side. Afterwards, you would deduct it from revenue on the credit side. That is how it would usually happen.
Issues with Delays regarding Accrued Income
However, what if you cannot receive the payment yet? Well, this depends on what type of accounting you are following. If this were cash accounting, then you would not need to do anything at all. If there is no cash to be found, then there will be no changes on the ledgers.
Only a few companies are following this in the modern world due to its impracticality. It would be difficult to do and achieve, especially if you are in a larger company. This is why most of us do accrual accounting, which involves all of the underlying transactions as well as previous and future ones.
This is where accrual income comes in. It is a concept that deals with recording payments even if you have not received them yet in real-time. This solves so many issues regarding cash accounting. For one, you do not need to wait for the payment itself before you can record it in the ledger. Second, you would be reminded of it while reviewing your records without disturbing the rest of your accounts. All you need to do is use your adjusting entries so that it would be more practical for you to do so. You do not have to forget anything as well.
Let us take the previous example. If you have already done the service, then you should already be paid. However, you may not have billed your clients for some reason, and you were delayed for a month. When using adjustment, you should record the revenue at the time when you have delivered the service.
As revenue is part of the credit, you should record the supposed payment under it. After which, you will have to increase your debt by logging the amount under accrued revenue.
Once you have received the payment, you should record this under the accounts receivable, where accrual income comes in. Then, add to the accrued revenue the same amount, which clears that account. This way, you have already made sure that the whole balance sheet is indeed balanced. That is the role of the adjustment entries: it is to correct or add to any entries based on the transactions. However, it is done in a way that would not deviate from the balance sheet and cash revenues, as this will serve to correct errors and other additions.
To summarize, an accrued income is a salary or compensation that is not received yet, even if the service has already been delivered. You need to record this under accrued revenue on the left side and revenue on the right side. Once you have received this, you will need to adjust the accounts receivable as well as the revenue on their respective sides. This action will lead to the account being balanced.
Also, this would clear that particular account, and you would be safe to assume that it has been resolved. Likewise, you would be able to see that the supposed payment has already been debited. This concept applies to almost every transaction, whether it’s a personal or company operation.
One way to manage your finances is through the professional services of an accounting firm. Annette Ferguson – Chartered Accountant and Certified Profit First Professional – can help you unlock financial strategies to improve the profitability of your business amidst an economic crisis. Book a call with us. You can also follow us on any of our social media channels and subscribe to our YouTube channel.