Plain definition
Accrued income is income recognised because the business has earned it under the relevant terms before it invoices the customer or receives cash. The other side may be a receivable when the only remaining condition is passage of time, or a contract asset when another condition must be met before invoicing; classification depends on the contract and applicable requirements. The name does not justify recording hoped-for sales or cash that is merely likely to arrive.
The practical test is whether the underlying performance has occurred and what right the company has at the reporting date.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A company holds a term deposit that earns of interest each month. The bank credits the accumulated interest every quarter, on 5 July. At 30 June, the company has earned for April, May, and June, so finance records interest income and the related receivable if its right to that amount is unconditional except for time. When the bank credits the amount in July, cash replaces the receivable rather than creating July income again.
The illustration assumes the contractual interest is known and no condition other than time remains. Variable returns, credit risk, disputed service milestones, and contract terms can change recognition or classification.
Why it matters
If earned income waits for cash, performance fluctuates with settlement dates instead of the activity that generated it. Management may misread margins, collection performance, or return on cash balances and make forecasts from a distorted base.
Practical consequence
Create an earned-but-unbilled register at close. For each item retain the contract or rate, performance evidence, calculation, expected billing or collection date, classification conclusion, preparer, and reviewer. Compare the later invoice or receipt with the accrued amount. Escalate large or aged balances, because an entry may be technically earned yet still face a collectability or contract dispute that decision-makers need to see.