When a company has performed service or sold goods to a customer, it should be recognized as income even if the amount is still to be collected in a future date.
If no journal entry was ever made for the above, then an adjusting entry is necessary.
The pro-forma entry for accrued income is:
*Appropriate receivable account such as Accounts Receivable, Rent Receivable, Interest Receivable, etc.
**Income account such as Service Revenue, Rent Income, Interest Income, etc.
Here's an Example
In our previous set of transactions, assume this additional information:
On December 31, 2013, Gray Network Services performed $300 worth of services to a client. The amount has not yet been collected and was never recorded in the journal of the company.
In this case, we should make an adjusting entry to recognize the income since it has already been earned. The adjusting entry would be:
To illustrate further, here are some more.
More Examples: Adjusting Entries for Accrued Income
Example 1: Company ABC leases its building space to a tenant. The tenant pays monthly rental fees of $2,000 covering a period from the 1st to the 30th or 31st of the month. On June 30, 2013, ABC Company did not receive the rental fee for June yet and no record was made in the journal.
Under the accrual basis, the rent income above should already be recognized because it has already been earned even if it has not yet been collected. The adjusting journal entry would be:
Example 2: ABC Company lent $9,000 at 10% interest on December 1, 2013. The amount will be collected after 1 year. At the end of December, no entry was entered in the journal to take up the interest income.
Interest is earned through the passage of time. In the case above, the $9,000 principal plus a $900 interest will be collected by the company after 1 year. The $900 interest pertains to 1 year.
However, 1 month has already passed. The company is already entitled to 1/12 of the interest, as prorated. Therefore the adjusting entry would be to recognize $75 (i.e. $900 x 1/12 ) as interest income:
The basic concept you need to remember is recognition of income. When is income recognized? Income is recognized when earned regardless of when collected.
If the company has already earned a right to it and no entry has been made in the journal, then an adjusting entry to record the income and a receivable is necessary.