Accrued income is that amount of income that is generated by the sale of goods and services, but has not yet been received by the supplier. The term can also apply to any income that is earned due to an investment fund of some type, but that has not yet been received by the investor. In both instances, the income continues to collect, or accrue, until it is paid in full on or by the agreed-upon date.
As it relates to investments, accrued income accumulates for one or more economic periods and is eventually paid in full to the investor. One example of this type of activity has to do with the accumulation of earnings generated by the activity of a mutual fund that is structured to disburse earning payments to investors on an annual basis. Throughout the year, the earnings are accrued and attributed to the investor. On the date cited in the agreement governing the investment, the fund administrator deposits the income into the investor’s account, or prepares a check that is mailed to the investor.
The same general approach applies to accrued income that is connected with the sale of goods or services. A supplier may contract with a customer to supply a cumulative number of units of a given product, with shipments broken down into equal amounts over a period of several months. Rather than remitting payment for each of those shipments, the customer defers payment until the total quantity is received. At that point, the supplier bills the customer for the cumulative amount of the orders and awaits payment that is rendered in accordance to the contract. Until that payment is received, the face value of the invoice is classified as accrued income.
With proper use of the accrued income model, the supplier is able to accrue a percentage of the income generated to each period where a shipment takes place. This approach helps to keep the balance between operational costs and sales revenue in sync, while also making it easier to track the amount of revenue generated by each individual shipment. For the customer, the ability to defer payment until all shipments are completed makes it possible to benefit from the use of those goods over several periods, without incurring any type of late charges on the orders. This model can be especially effective when large quantities of products are involved, and the products are intended for use in the customer’s generation of income to settle the invoice when it comes due.