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 for accrued income 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.
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.
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?
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).
As the $5,000 is not received in cash on this date, we record a debtor (the Smiths).
Remember that 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 the debtors.
So, here is the journal entry for recording this accrued income:
There you go, that's the accrued income journal entry for our example: debit debtors (asset) and credit services rendered (income).