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Hallo,
1. I am explaining to myself the accrued income, may I ask if this is correct:
– when we haven’t received the money yet – we transfer the balance to balance sheet under current assets, before that accrued income is a debit in the Trial balance, since it is a receivable
– once we receive the cash – we recognize it as an income, so it goes to the I/S a/c as a credit entry2. But at the same time, I read that:
– accrued income is deducted from current assets in the balance sheet, which I can’t explain, as I know it is listed under current assets, but not deducted?
and
– accrued income is an expense in the I/S a/c – why expense, probably this is before cash is received, and does this create two accounts, one which balance is transferred to Balance sheet, as current assets and one for the amount which is transferred to the I/S a/c, as an expense, both before cash is received?Is all this right or wrong, or some is right, some is wrong?
Thank you!
Thank you!
Your first statement is half correct.
Accrued income appears in the Statement of Financial Position as a current asset.
It is recognised as income when it is earned – not when the cash is received.You second statement is wrong!
I read the second statement from obviously not that a reliable source, and compared it to a financial accounting book, where nothing alike was mentioned, so you answer helped to make sure what’s right and not to confuse myself further.
Thank you very much!
Hallo,
If we talk about accrued income, how are profit, income and assets affected, i.e. which increases and which decreases?
E.g .accrued income is a receivable, so it’s an asset, so we have an increase in assets, but a decrease in income and consequently in profit, is this correct?
Thank you!
No!
Accrued income is certainly a receivable, and therefore an asset.
It is certainly not income for this year (it is last years income).
As to whether it affects this years profit depends. It should not affect it at all – when we receive the money we should Dr cash and cr receivables. It will only affect this years profit if it has been entered incorrectly.
Hallo,
Actually, I was asking, because in the book I’m reading it is said that:
1. Prepaid income received
Effect on income/expenses – reduces income (as it doesn’t relate to the current period)
Effect on profit – reduces profit (I guess because we have less income)
Effect on assets/liabilities – increases liabilitySince the book doesn’t say anything about the accrued income receivable, how would I answer it, is it correct, following the above to say:
2. Accrued income receivable
Effect on income/expenses – increases income (for the current period)
Effect on profit – increases profit (due to higher income for the period)
Effect on assets/liabilities – increases assetsWould 2 be correct the way I wrote it?
Thank you!
Hello,
I’m referring to the FFA text book and it says,
•An accrued expense reduces profit
•A prepayment increase profit
•Accrued income increases profit
•Prepaid income reduces profit
According to the accruals and matching concepts can you please explain,
1.why the above 4 points increases and reduces profit ?
2. does the above points refer to the current period or next accounting period ?
Thank you
An accrued expense is an expense for this period that has not yet been paid. When we adjust for it then he fact that there is an expense reduces profits.
A prepayment is a payment made in this period that relates to the following period. It is not an expense of this period and therefore adjusting for it increases the profit.
Accrued income is income for this period for which we have not yet received the cash. When we adjust for it the profit increases.
Prepaid income is cash received in this period which is income for the next period. When we adjust for it the profit this period is reduced.
All the above relates to the profit for the current period.
All of this is explained in my free lectures. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Hello,
Thank you for your reply. I’m still confused with accrued income, if we already earned that income for the period why do we need to adjust it and say profit increased ?
According to the matching concept,
Book explanation – revenue earned during an accounting period is matched in SOPL with the expense incurred in earning that revenue.
Accrued income is income that has been earned during the period, but has not been recorded during the period because the income has not been received.
Therefore an adjusting entry is needed at the end of the period (just as an adjusting entry is required for accrued expenses) so as to include the income in this period. Including the income in this period increases the profit.
Again, have you watched my free lectures?
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