When a company has performed services or sold goods to a customer, it should be recognized as income even if the amount is still to be collected at a future date. These are know as accrued income (or accrued revenue).
Accrued income (or accrued revenue) refers to income already earned but has not yet been collected.
At the end of every period, accountants should make sure that they are properly included as income, with a corresponding receivable.
Dr Receivable account
Cr Income account
The adjusting entry to record an accrued revenue is:
*Appropriate receivable account such as Accounts Receivable, Rent Receivable, Interest Receivable, etc.
**Income account such as Service Revenue, Rent Income, Interest Income, etc.
In our previous set of transactions, assume this additional information:
On December 31, 2020, Gray Electronic Repair Services rendered $300 worth of services to a client. However, the amount has not yet been collected. It was agreed that the customer will pay the amount on January 15, 2021. The transaction was not recorded in the books of the company as of 2020.
In this case, we should make an adjusting entry in 2020 to recognize the income since it has already been earned. The adjusting entry would be:
Here are some more illustrations.
Example 1: Company ABC leases its building space to a tenant. The tenant agreed to pay monthly rental fees of $2,000 covering a period from the 1st to the 30th or 31st of every month. On December 31, 2020, ABC Company did not receive the rental fee for December 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, 2020. 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? Under the accrual concept of accounting, income is recognized when earned regardless of when collected.
If the company has already earned the 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.