Accrued Income is money that has been earned but has not yet been invoiced/received.
Accrued Income is also known as Accrued Revenue.
How does Accrued Income Work?
Most companies use accrual accounting. IFRS and GAAP (the main two accounting principles and standards in the world) prefer companies to match revenue and costs in period that the revenue was earned.
From a management accounting perspective it will help paint a more accurate picture of the financial position of the company. You can see how profitable the work carried out has been, and it will allow you to see more of a trend over a period of time.
Accrued Income sits on the balance sheet as a current asset. As it is expected to be transformed into cash in the next 12 months.
Lets look at the two graphs below. This is for a business called Telecoms Engineers Company. The first method shows the profit and loss over the year looking at the cash coming in and out of the bank. The second graph uses Accrual Accounting and shows revenue and costs matched into the periods the revenue was earned.
As a Management Accountant, Financial Controller or Finance Director – it’s hard to imagine how you could give useful commentary to Directors and Investors looking at the Cash Accounting graph. It’s difficult to see any trends and explain which projects have made or lost money.
The Accrual Accounting graph is much easier to read. From this you can see that Telecoms Engineers have made profit in most months other than June and July. Digging into the numbers and talking with managers we can much easier paint a picture of what happened in the year. Directors and Investors often to want data that’s easy to read, this is why Accual Accounting is the usual way of doing it.
As an example.
- Projects carried out in Jan – May was fairly stable with a slight increase in revenue. Unfortunately costs also went up so profit remained around $20,000.
- A big project in June, July and August went over budget due to issues with installing the 5g antennas. This was due to the installation being done incorrectly 3 times. A review is being done into why this occurred.
- Historically revenue has always dropped during the end of the year, reaching a low in December. This has been the trend for the past five years. Revenue is expected to be around $80,000 in January 2021.
At Telecoms Engineers costs may come in months before they are paid for the work. Say they buy all the equipment in January, they may only finish installing the equipment in March or April, and may not get paid for another month. So this would mean costs and revenue, for the same work, are appearing on the accounts several months apart if you use the cash accounting method.