What it means
Many non-finance managers assume revenue only exists when money lands in the bank account. However, modern business accounting relies on the accrual concept.
This means you record income when you earn it, which gives a realistic view of financial health. Imagine you complete a project on the final day of November, but your client payment terms mean you send the invoice in December and get paid in January.
Without accrued income, November looks quiet and December looks unusually busy. Accruing the income in November fixes this distortion.
Why does this matter? It ensures your financial statements show true performance.
If you ignore accrued income, your monthly profit figures bounce around unpredictably based entirely on when bills are sent and paid, making it hard to spot trends or manage cash flow. In practice, your finance team creates an adjusting journal entry at the end of each accounting period to log accrued income.
They debit an asset account called accrued income or unbilled revenue, and credit your revenue account. When the customer finally pays, you reverse this entry.
In practice
Real-world examples.
Example
A freelance designer completes a website for a client on the 28th of June. She does not send the invoice until the 3rd of July. She records the fee as accrued income for June.
Example
A small catering firm feeds a corporate conference on the 30th of November. Because monthly billing happens on the 5th of December, they record the catering revenue as accrued income in November.
Example
A software consultancy provides IT support hours during December, but their contract specifies quarterly billing ending in January. They record the December hours as accrued income at year-end.
Think of it
“Imagine baking a cake and selling a slice to a neighbour who promises to pay you tomorrow. You have already delivered the goods and earned the money, so you note down the sale today even though your wallet is still empty.
Formula
Calculation
Accrued Income = Completed Work Value - Invoiced Amount
For example, if your marketing agency completes three blog posts worth 300 pounds each at month-end, but you have not yet billed the client, your accrued income is 900 pounds.Case study
Seen in the real world.
GreenLeaf Landscaping, a fictional commercial gardening business, completed a major winter clearing project for a local council on the 28th of February. The agreed fee was 5,000 pounds. Because of administrative delays, the finance department did not raise the invoice until the 10th of March. GreenLeaf uses accrual accounting. To ensure February financial reports reflected the actual work done, the accountant made an adjusting journal entry for 5,000 pounds of accrued income. This boosted February revenue and created a current asset on the balance sheet. When the council paid the invoice in March, the accountant cleared the accrued income balance and moved the funds into the cash account. This simple step prevented GreenLeaf from understating its winter performance and helped the management team make accurate budget decisions.
Watch out
Common mistakes.
- Waiting until the customer pays before recording any financial activity.
- Forgetting to reverse the accrual entry once the actual invoice is finally issued, which leads to double-counting revenue.
- Confusing accrued income with deferred income, which is money received in advance for work not yet done.
Questions
People also ask.
Is accrued income the same as accounts receivable?
No. Accounts receivable means you have sent an invoice and are waiting for payment. Accrued income means you have earned the money through completed work, but have not yet sent an invoice.
Does accrued income affect my tax bill?
Tax rules vary by region, but under standard accrual accounting rules, you generally report income when it is earned, meaning accrued income may influence your taxable profit for the period.
How does this appear on the balance sheet?
It is listed as a current asset, usually called accrued income or unbilled revenue, because it represents money owed to you by customers.
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