What is Accrued Income? Accrued income means the income which has become due for a particular period but not received till the end of that particular period. At the time of finalization of accounts all incomes relating to a financial year, must be taken in to account to know the exact profitability of the firm. But it is not possible that all income are received by the firm at the time of finalization. Therefore, the need of accrued income arises.
Examples of Accrued Incomes
- Interest on Fixed deposits with Banks or with other Organizations.
- Interest from National Saving Certificates, Provident Fund, Public Provident Fund etc.
- Commission earned but not received.
- Rent receivables etc.
M/s XYZ Limited deposited Rs.10 lacs on 01.10.2016 as fixed deposit with an interest 10% with State Bank of India and the maturity date of Fixed Deposit was 30.09.2017. What will be the accrued income of the firm as on 31.03.2017?
Amount of fixed deposit: Rs.10,00,000/=
Period of fixed deposit: One year (01.10.16 to 30.09.17)
Rate of Interest: 10%
Accrued Interest for Financial Year 2016-17 will be: 10% on Rs.10,00,000/= from 01.10.16 to 31.03.17 i.e. for six months – Rs.50,000/=
This accrued interest shall be treated as accrued income in final accounts of M/s XYZ Limited as on 31.03.17.
Accounting Entries of Accrued Income
If we take the above illustration then the following entry shall be passed by the accountant:-
Debit: Accrued Income Account Rs.50000/=
Credit: Interest on Fixed Deposits Account Rs.50000/=
(Being amount of interest from 01.10.16 to 31.03.17 is receivable on fixed deposits with State Bank of India as per the bank interest certificate enclosed)
Supporting Document for Accrued Income:
For above entry the Interest Certificate of State Bank of India shall be the support document. There may be any written document for the purpose of accrued income according to the type of transaction. For example, National Saving Certificate itself is a support document for calculation of interest.
Treatment of Accrued Income in Final Accounts
Accrued income is shown in the credit side of profit & loss account and in assets side of balance sheet.
Importance of Accrued Income
As we know that there is a time frame for preparation of final accounts of every business firm or every individual. For example in India, accounts are finalized on 31st March relating to financial year April to March. Though there is no such condition that you have to prepare your final accounts once in a year only. Everybody is free to prepare the final accounts whenever he needs. Of course, for taxation purpose, the final accounts are prepared at the end of March.
These Final Accounts may be required by the business firms before the end of the financial year because of various reasons like:-
1) To take so many decisions by management:-
- for controlling the cost
- to increase the sales
- to decide the salaries and remunerations of the employees
- to submit the final accounts periodically, in stock exchanges, if the company is listed.
2) Some time it becomes mandatory to publish the final account periodically.
3) In India, there are so many authorities who interact with business firms and may require the final accounts for some assessment from time to time.
4) Any other reason.
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