Accounting is a vast field with tons of jargon involved. Most people shy away from its practices because of this reason.
The case with accounts receivable and accrued income is a good example. Both of them are essentially an asset for organizations.
However, they have several distinguishing factors that must be understood for the sake of accuracy.
- Accounts receivable arise from sales of goods or services on credit.
- Accrued income represents revenue earned but has yet to be invoiced.
- Both are assets but differ in nature, calculation, and presentation on financial statements.
Accounts Receivable vs Accrued Income
The difference between accounts receivable and accrued income is that accounts receivable refers to outstanding payments, which means that the company has issued an invoice to customers but they have not made any payments in response, whereas accrued income refers to the amount that is expected to be paid by customers, even before forming an official invoice.
Accounts receivable involves a situation in which the goods or services have been given to the customers. Moreover, an official invoice or bill has also been presented to them.
However, the customer has not yet paid the amount that he is supposed to. In this case, the amount is expected to be received and is shown in the balance sheet as accounts receivable.
Meanwhile, accrued income revolves around a similar situation. However, in this case, the goods or services have been given to the customer but an official invoice or bill is not made.
Unlike the former, accrued income is recorded in the income statement as soon as the company has done everything that they are required to in order for the customer to pay them.
|Parameters of Comparison||Accounts Receivable||Accrued Income|
|Meaning||It is an outstanding payment that has been billed.||It is an outstanding payment that has not been billed yet.|
|Account||It is an asset account represented on the balance sheet.||It is a personal account represented on the balance sheet.|
|Connotation||It revolves around money that has been earned and billed.||It only revolves around money that has been earned.|
|Enforcement||It is a claim that can be enforced legally.||It is a claim that cannot be enforced legally.|
|Nature||It is recognized and realized.||It is recognized but not realized.|
What is Accounts Receivable?
Accounts receivable is an important concept that is used extensively in the field of accounting. Generally, when a company sells goods or services, it generates an invoice.
This is a legal enforcement on a customer, according to which he must pay for consuming the goods or services. When a company has done the needful on their part, and has made a bill as well, but has not received any payment yet, it is called accounts receivable.
Accounts receivable essentially represents a situation in which money has been earned by the seller, and a bill has been given to the buyer. Therefore, it is an outstanding payment.
This means that the transaction has been recognized and realized as well since both parties are aware of the situation.
When it comes to making an entry in the company records, accounts receivable is considered to be an asset account. This is because it revolves around money that is owed to the company.
They have to receive it under any circumstances in the short term. Further, the entry is made on the balance sheet if the customer has not been able to pay the amount before the end of the fiscal year.
In most cases, a turnover ratio is calculated and analyzed to check the amount of accounts receivable.
What is Accrued Income?
Accrued income revolves around a very similar situation to the former. When a seller has done everything on their part while making a sale but has not created an invoice for the customer, the amount supposed to be received is called accrued income.
Therefore, unlike the former, the seller has not made any legal enforcement.
This means that the transaction has been recognized by the buyer and seller. However, it has not been realized yet since there is no formal billing that has been done.
The outstanding payment is then represented by making an entry for a personal account in the balance sheet.
Accrued income is used extensively in the service industry, especially in cases where customers are supposed to receive and pay for goods or services on an hourly basis.
In such a situation, the bill is formally made only when the customer is satisfied and no longer wants to deal with the transaction. Therefore, all the amount that has been earned during the phase of the transaction before billing is an accrued income.
Once the billing has been done and the payment has been made by the customer, accrued revenue is debited to cash. This means that according to the records, the customer has paid all dues and there is no outstanding payment that has to be received by the seller anymore.
Main Differences Between Accounts Receivable and Accrued Income
- Accounts receivable is an outstanding payment that has been billed whereas accrued income is an outstanding payment that has not been billed yet.
- Accounts receivable is an asset account represented on the balance sheet whereas accrued income is a personal account represented on the balance sheet.
- Accounts receivable revolves around money that has been earned and billed whereas accrued income only revolves around money that has been earned.
- Accounts receivable is a claim that can be enforced legally whereas accrued income is a claim that cannot be enforced legally.
- Accounts receivable is recognized and realized whereas accrued income is recognized but not realized.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.