What it means
Income is earned when the work is done or the goods are delivered, which is often well before the invoice is raised. Accrued income is the entry that puts that earned but unbilled amount into the right accounting period.
It matters most in businesses that bill in arrears or in stages. Consultancies, construction firms, maintenance contractors and lenders all deliver value continuously while invoicing monthly, quarterly or on milestones, so at any period end there is genuine income sitting outside the invoicing system.
Leaving it out understates both profit and assets, which distorts every margin and growth figure a manager might look at. It also makes the sales team's performance look worse than it is, because revenue lands a month or a quarter later than the effort that produced it.
The calculation is normally a simple apportionment: take the contract value, work out the rate per day or per month, and multiply by the time elapsed since the last invoice. For milestone contracts, the measure is usually the proportion of work certified as complete rather than a straight time split.
Accrued income is a close cousin of a trade receivable but not the same thing. A receivable is backed by an issued invoice with a due date, whereas accrued income is a right to bill that has not yet been converted into one, which is why auditors look at it carefully and why it usually sits on its own line.
The judgement to apply is whether the money will really be billed and collected. Accruing income for work the client has not accepted, or for hours that fall outside an agreed budget, flatters this year's revenue and creates an awkward write-off later, so most finance teams review the accrued income listing line by line every month.
In practice
Real-world examples
Example 1
An engineering consultancy has 620 hours of chargeable work logged in June that will not be invoiced until the project milestone in August. At a $150 charge-out rate that is $93,000 of accrued income recognised in June rather than left to distort the August figures.
Example 2
A bank closing its quarter accrues interest earned on its loan book since the last interest date, adding several days of income that customers owe but have not yet been charged.
Example 3
A commercial landlord whose tenant pays a service charge annually in arrears accrues one twelfth of the expected charge each month, so the property's monthly income statement reflects the service it is actually providing.
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 = revenue earned to date - amounts already invoiced.
A support provider signs a 12-month contract worth $120,000, billed quarterly in arrears. The monthly value of the contract is $120,000 / 12 = $10,000.
The last invoice covered the quarter ending 31 December, and the company is now closing its accounts at 28 February. Two months of service have been delivered since the last billing date, so the accrued income is 2 x $10,000 = $20,000.
That $20,000 is recorded as revenue in January and February and as an asset called accrued income on the balance sheet at 28 February. When the next quarterly invoice of $30,000 is raised at the end of March, the accrued income balance is cleared and only the remaining $10,000 is recognised as March revenue, so nothing is counted twice.Case study
Seen in the real world
Waverly Grid Surveys is an invented civil engineering practice presented here as an illustrative example. It bills its largest client quarterly in arrears under a $120,000 annual retainer, and for years its monthly management accounts showed two quiet months followed by one enormous one.
A new finance manager introduced an accrued income entry of $10,000 a month for the retainer and a similar apportionment for three smaller contracts. Revenue in the management accounts stopped lurching, and the gross margin per surveyor became a number the directors could actually compare month to month.
The change also exposed a problem. Roughly $46,000 of accrued income had been sitting unbilled for more than six months on one contract because nobody owned the invoicing trigger, and the fictional firm recovered it only after building a monthly review of the accrued income listing.
Watch out
Common mistakes
- Confusing accrued income with a trade receivable, when the difference is simply whether an invoice has actually been issued.
- Accruing income for work that is disputed or unlikely to be billed, which overstates both revenue and assets.
- Letting an accrued income balance sit for months without asking why the invoice has never been raised.
Questions
People also ask
Is accrued income the same as deferred income?
No, they are opposites: accrued income is earned but unbilled, while deferred income is billed or paid in advance of the work being done.
Where does accrued income appear in the accounts?
As a current asset on the balance sheet, usually shown separately from trade receivables, with the matching credit going to revenue.
Does accrued income get taxed?
Generally yes, because tax normally follows the accounting profit rather than the timing of the cash, though the detail depends on local rules.