Definition: Accrued income is a sum of money earned but yet to be delivered to the person or company who earned it. It is an accounting concept that refers to a situation where a gain has taken place, but it is not yet in the hands of the recipient. Thus, it is recorded as a receivable on the books.
What Does Accrued Income Mean?
This kind of income occurs commonly in financial instruments that have certain payment cycles. For example, a bond that has a biannual coupon can be accrued on a monthly basis but the actual money earned will be delivered at the end of each cycle. This accrued income serves as an estimation of the pending earnings yet to be received and it is considered an asset for the bondholder. The value of the bond in that case will be its actual market value plus any accrued income yet to be paid.
This is particularly important for companies, since they normally produce monthly financial statements for management purposes and in order to portrait an accurate financial position accountants must estimate the accrued income of the financial instruments owned by the company. An accrued income account will be recorded as an asset and it will be offset by the subsequent delivery of the income, therefore the asset is gradually converted into revenue, interest or dividends earned.
Let’s say Company A is starting its operations in January 1 and it has $25,000 of capital available that will be invested in different financial instruments. In January 2, the company decided to invest $10,000 in bonds that pay a 5% interest rate in quarterly payments. The company bought these bonds at $12,500 and this means they will receive a quarterly amount of $500. The payment cycle starts at January 1 and payments occur each 90 days after that (a quarter).
At the end of April (two months before the 2nd payment cycle) the company’s management required a financial statement and the accountant had to accrue the income earned through this financial instrument during the first month of this cycle. This income hasn’t been received but it has been earned already. After performing the calculations, the accrued income at the end of April was $41,67.