People often interchange Accrued income for accrued revenue thinking that they mean the same thing. The difference between accrued income and accrued revenue can be confusing. Notwithstanding of which is being considered in order for one or both to apply, the business must use accrual basis rather than cash basis accounting.
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Accrual Basis Accounting
In accrual-basis accounting, income is only recognized when it is earned -- either realized or when the business has a reasonable expectation the income will be realized -- rather than when cash is actually received. Accrued income also means when a monthly or quarterly account statement shows interest earnings from an investment that pays dividends yearly. Having accrued revenue, this means as each project or part of the service contract reaches an agreed-upon billing milestone.
In balance sheet, accrued income is considered to be a current asset and is recorded in an accrued receivables account. Every accounting entry debits the appropriate receivable and credits the accrued income account. So whenever payment is eventually received, a single entry debits cash and credits the accrued income account. For instance, two bond interest payments of $300 received in different months will each be recorded as a $300 debit Bond Interest Receivable and a $300 debit to Accrued Bond Interest Income. Whenever the payment is made the payment will be recorded as a $600 debit to cash and a $600 credit to Accrued Bond Interest Income.
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Often, accrued revenue accounting records interim entries as a debit to an accrued billing account and a credit to a revenue account. In Accounting, just before preparing an invoice, an adjusting entry reverses the accumulated accruals and a second entry records the total invoice amount. For example, an interim entry of $5,000 for consulting services will be recorded as a $5,000 debit to Accrued Billings and a $5,000 credit to Consulting Revenue. If the agreement sets a milestone of two consulting appointments at $5,000 each, the next entry will reverse the interim accrual by debiting Consulting Revenue and crediting Accrued Billings. When the invoice goes out, a $10,000 debit to Accounts Receivable and a $10,000 credit to zero out the Consulting Revenue account are recorded.
Differences Between Accrued Income And Accrued Revenue
From Technical point of view, accrued income and accrued revenue are not at all the same. Accrued income applies to businesses that receive interest income from investments while Accrued revenue applies to businesses that perform services or work on projects with multiple billable components but they do not send out an invoice until the service contract or project is finished. Even though accrued income and revenue are technically different, businesses that use delayed billing sometimes use the term accrued income to mean accrued revenue.