Accrued Income Journal Entry
(Part 1)


Previous lesson: Journal Entry for Income (Cash Example) 
Next lesson: Journal Entry: Cash Received From a Debtor / Accounts Receivable (Accrued Income Part 2)





In this lesson we're going to continue with our sample business, George's Catering, go through an accrued income example and see what the journal entry is.


The Accrual Basis of Accounting:
A Quick Reminder

Remember: income and expenses are recorded using the accrual basis of accounting.

Accrual describes amounts that are owed.

Accrued income is income that is owed to us.

Accrual Basis of Accounting

The accrual basis of accounting means that if a sale is made in October, but cash is received in January, the income is recorded in October (not when the cash is received in January). 

Between October and January we record that cash is owed (a debtor is recognized).



Accrued Income Example

f) George’s Catering provides catering services for a funeral for the Smiths. The services are provided on the 8th of April and the agreed fee is $5,000. As part of the agreement, the Smiths will only make payment at the end of April.

Catering services

Here's where George’s Catering stood up to now:


What is the journal entry we record on the 8th of April? What do we do?

Accrued income: income, equity & debtors increase

First of all, the income is recorded straight away on the 8th of April, as the income, meaning the event that will lead to money, has taken place. What is that event? Providing catering services for the funeral. So the business has earned income, and this is worth $5,000.

Income belongs to the owner, it increases on the right - the same side as the owner’s equity. Thus, we credit the income (services rendered).

Debtor / accounts receivable

As the $5,000 is not received in cash on this date, we record a debtor (the Smiths). The account we will normally used to record this debtor is called accounts receivable.

Remember that accounts receivable (a debtor) is an asset, as it will bring us future benefits in the form of getting paid.

Assets increase on the debit side, so we debit accounts receivable.


Journal Entry

So, here is the journal entry for recording the accrued income: 

There you go, that's the accrued income journal entry for our example: debit accounts receivable (an asset, also known as debtors or receivables) and credit services rendered (income).



Okay, so that example was a little tricky. If you still feel a bit confused about the debit and credit entries, check out this excellent lesson entitled Debits and Credits: what they really mean.

Otherwise, feel free to move on to the next lesson (part 2 on accrued income), where we'll learn the journal entry for when the debtor actually pays off his debt.



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Previous lesson: Journal Entry for Income (Cash Example)
Next lesson: Journal Entry: Cash Received From a Debtor / Accounts Receivable (Accrued Income Part 2)



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