Accrued & Prepaid Incomes (Cambridge International A-Level Accounting)

Accrued income

What is an accrued income?

• An accrued income is an income that is still owed to the business at the end of a financial period

  • This is also called an accrual
  • The income is in arrears

• Accrued income can occur at the end of a financial period when a business receives less than the amount due in that period

  • This commonly happens when the invoice period of an income does not align with the financial period of the business

  • The business might receive payment at the end of the invoice period

    • However, this might be after the end of the current financial period

• An accrued income is an asset to the business

  • The business is owed money by its customers

How do I record accrued income?

• The income account will have a debit balance if there is an accrual at the end of the financial period

  • This indicates that it is an asset, as the business is still owed money from customers for that period

• The full amount that is due for the period is stated on the statement of profit or loss

• The amount that is accrued appears on the statement of financial position as a current asset

  • It is included in the amount for other receivables

Example of an income account with an accrual

Prepaid income

What is a prepaid income?

• A prepaid income is an income for the next financial period that is received in advance during the current end of a financial period

  • This is also called a prepayment

• Prepaid income can occur at the end of a financial period when a business receives more than the amount due in that period

  • This commonly happens when the invoice period of an income does not align with the financial period of the business

  • The business might receive payment in full as soon as they issue an invoice

    • However, this invoice might also cover part of the next financial period

• A prepaid income is a liability to the business

  • The business has received too much from the customer for that period
  • Technically, the business owes that money to the customer for that period

How do I record prepaid income?

• The income account will have a credit balance if there is a prepayment at the end of the financial period

  • This indicates that it is a liability

• The full amount that is due for the period is stated on the statement of profit or loss

• The amount that is prepaid appears on the statement of financial position as a current liability

  • It is included in the amount for other payables

Example of an income account with an accrual