The Accrual of Income

The accrual of income

At the end of an accounting period, the total sales income for the year will / have been recorded already in the accounts system, and the amounts unpaid, by customers in respect of these sales will have been included under sundry debtors. The outstanding income which may not already have been recorded is limited, therefore, to income other than sales, such as rent receivable, commission's receivable etc. The accountant must adjust his end-of-year figures so as to include all the income to which the business is legally entitled, even though it has not been received.

Example

On 1 December 19X0, John Smith had sub-let a portion of his premises, which had never been utilized, for a monthly rent of £60 payable in advance on the 1st of each month. By 31 December 19X0, the date on which the trial balance was extracted, the rent receivable had not yet been received. To accrue the rent receivable, the accountant must enter the amount accrued in the rent receivable account.

In adjusting the receipts for the year so that they will correctly show the income of the year, the accountant accrues income not yet received, as. we have seen above, but also carries forward to the following year any receipts of the current year which are the income of the following year.

If, however, there had been an omission of income from the accounts of the preceding year, and this income is received in the current year, it would be impossible to go back and adjust the accounts of the previous year. Those accounts will have been closed at the end of that accounting period. The accountant will include last year's income in the current year's income, and indicate that it was an omission from last year, or explain how this income arose. Adjustments of this nature often arise out of the settlement of legal disputes or compensation claims.


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Read on: Periodic Measurement and the Accrual Convention

Periodic measurement and the accrual convention

The next task of the accountant is to verify that the revenues and expenses are attributable to the accounting period. It is the normal practice to record in the expense accounts those amounts actually paid during the period') As a result, at the end of the period, these accounts may be understated or overstated. Likewise, it is possible that there may be some outstanding revenue due to the business, other than sales revenue, which must be brought into the year's income.

The governing principle which affects these adjustments is the... see: Periodic Measurement and the Accrual Convention