Outstanding Income Journal Entry is Outstanding Income account is debited because it represents the amount of revenue earned but not yet received and which is amount receivable, To Revenue account is credited because it represents the income earned during the period. Outstanding income refers to the revenue that has been earned but not yet received by the end of an accounting period. Recording outstanding income is crucial for accurate financial reporting and adhering to the accrual basis of accounting.
What is Outstanding Income?
Outstanding income, also known as accrued income, is revenue that a business has earned but has not yet received. This situation typically arises when services have been rendered or goods have been delivered, but payment has not yet been collected.
Journal Entry for Outstanding Income
When recording outstanding income, two main accounts are affected:
- Outstanding Income (or Accrued Income) Account: This asset account records the amount of revenue earned but not yet received.
- Revenue Account: This account records the income earned during the period.
Here is the structure of the journal entry for recording outstanding income:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Outstanding Income | Amount | Record earned but unreceived income | |
| DD-MM-YYYY | To Revenue | Amount | Record earned income |
Example of a Outstanding Income Journal Entry
Let’s say on 31-12-2023, a business has earned ₹15,000 in consultancy fees that will be received in the next period.
Journal Entry for Outstanding Consultancy Fees:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2023 | Outstanding Income | 15,000 | Earned consultancy fees | |
| 31-12-2023 | To Consultancy Revenue | 15,000 | Consultancy fees earned |
In this example:
- Outstanding Income account is debited because it represents the amount of revenue earned but not yet received.
- To Consultancy Revenue account is credited because it represents the income earned during the period.
Why Record Outstanding Income?
- Accurate Financial Statements: Ensures that all earned revenue is recorded, providing a true picture of the business’s financial performance.
- Accrual Accounting Principle: Recognizes revenue when it is earned, not necessarily when it is received.
- Asset Recognition: Identifies amounts that will be received in the future, aiding in financial planning and cash flow management.
Steps to Record Outstanding Income
- Identify Earned Income: Determine the amount of revenue that has been earned but not yet received by the end of the period.
- Create the Journal Entry: Debit the outstanding income account and credit the revenue account.
- Adjust Financial Statements: Ensure the outstanding income is reflected in the financial statements.
Conclusion
Recording outstanding income accurately is crucial for maintaining reliable financial records and ensuring the financial statements reflect the true financial position of the business. By understanding how to create the journal entry for outstanding income, businesses can adhere to accounting principles and manage their earned revenue effectively.