Accrued income and unbilled work

Accrued income is income a business has earned by the year end but not yet invoiced. If the goods have been delivered or the service performed, the income belongs in that period even though the bill goes out later, and it sits on the balance sheet as an asset until the invoice is raised. Under FRS 102 from 2026 unbilled amounts are split between trade receivables and contract assets depending on whether the right to be paid is already unconditional.

What is accrued income?

It is the opposite of deferred income. Deferred income is cash received before the work; accrued income is work done before the bill. Typical examples are:

hours worked in the last weeks of the year by a consultant who bills monthly in arrears;
a completed stage of a project where the contract only allows an invoice at the next milestone;
a commission or referral fee earned on a transaction that completed before the year end but has not yet been claimed;
goods delivered on the last day of the year, invoiced the following week.

The basic adjustment is introduced in accruals and prepayments. This page covers when unbilled income can be recognised, how to measure it, and the VAT and tax consequences.

When can unbilled work be recognised?

Revenue is recognised when, or as, the business satisfies a performance obligation by transferring control of the goods or services to the customer (FRS 102 paragraph 23.78). Invoicing is irrelevant to that test. HMRC’s Business Income Manual at BIM31080 takes the same view: income is generally earned when goods are provided or services performed, and the timing of bills, invoices or payments does not determine when income is recognised.

For services, the key question is whether the obligation is satisfied over time under the three tests in paragraph 23.81, such as the customer receiving and consuming the benefit as the work is performed. If it is, revenue is recognised as the work progresses and the unbilled portion at the year end is accrued income. If it is not, revenue waits until the point at which control passes, and costs incurred to date are carried as work in progress rather than accrued income. The detailed tests for long contracts are explained in revenue recognised over time for contracts.

Two practical shortcuts and limits apply:

Right to invoice. Paragraph 23.103 allows revenue to be recognised at the amount the business has a right to invoice where that corresponds directly with the value of the work to date, for example a fixed rate for each hour of service. For many time based businesses, unbilled hours at the agreed rate is therefore the accrued income figure.
Uncertain fees. Where the fee depends on an outcome, such as a success fee, paragraph 23.46 allows the variable amount to be included only to the extent that it is highly probable the business will be entitled to the cumulative revenue recognised once the uncertainty is resolved.

Is accrued income a receivable or a contract asset?

FRS 102 now draws a line that older accounts often blurred. Under paragraph 23.127 a trade receivable is a right to consideration that is unconditional, meaning only the passage of time is needed before payment is due. Under paragraph 23.126 a contract asset is a right to consideration that is conditional on something other than the passage of time, such as completing further work under the same contract.

So unbilled hours that the business is entitled to invoice today are, in substance, a receivable that simply has not been billed. Work towards a milestone that cannot be invoiced until the milestone is reached is a contract asset. Paragraph 23.128 allows the business to keep the description accrued income, provided users can distinguish trade receivables from contract assets. In the small company formats in Schedule 1 to SI 2008/409 the balance appears under prepayments and accrued income, which may be shown as a separate item or within other debtors.

Both are assets that can be impaired. Paragraph 23.126 requires contract assets to be assessed for impairment under Section 11. A disputed job, a client in financial difficulty or a history of writing off unbilled time are all reasons to reduce the figure.

How is the figure calculated?

List the contracts or clients with work performed but not billed at the year end.
Measure the work done: unbilled hours at the agreed rates, units delivered, or the stage of completion for fixed price work.
Deduct anything already invoiced or received on account for the same work, so income is not counted twice.
Consider recoverability: will the client accept and pay the amount, and is any part subject to a cap, write down or dispute?
Post the accrual net of VAT and reverse it, or clear it, when the invoice is raised.

What does a worked example look like?

Illustration only. A marketing consultancy with a 31 March year end has three clients with unbilled work at 31 March 2027.

Client	Position at 31 March 2027	Accrued	Classification
A	40 hours in March at £100 an hour, billed monthly in arrears	£4,000	Unbilled receivable
B	Fixed fee £10,000, 60% complete, invoice allowed only at final delivery	£6,000	Contract asset
C	25 hours, but the client has disputed the scope and will pay for no more than 10	£1,000	Unbilled receivable

Accrued income of £11,000 is credited to revenue and debited to accrued income. Client C is restricted to the amount that will be recovered.

When is VAT due on unbilled work?

VAT does not follow the accrual. VAT Notice 700 paragraph 14.2.1 says the basic tax point for services is the date the service is performed, normally taken as when all the work except invoicing is completed. Under paragraph 14.2.2 an invoice issued, or a payment received, before that date creates an earlier tax point, and an invoice issued within 14 days after the basic tax point becomes the tax point instead.

That has two consequences. Accrued income on a service still in progress at the year end will not usually have reached its basic tax point. But where a job was completed and the invoice is not issued within 14 days, VAT is due at the basic tax point, so a backlog of unbilled completed work can create a VAT liability before any invoice exists. Notice 700 also explains that the 14 day period can be extended only with HMRC approval.

How is accrued income taxed?

Trading profits are calculated in accordance with generally accepted accounting practice, subject to any adjustment required by law: section 25 of the Income Tax (Trading and Other Income) Act 2005 for traders not on the cash basis, and section 46 of the Corporation Tax Act 2009 for companies. Correctly accrued income is therefore taxable in the year it is recognised in the accounts, not when it is billed or paid. BIM40070 notes that the accounting for long term or construction contracts may recognise income as earned before payment is received.

Sole traders and partnerships using the cash basis record income only when received, so there is no accrued income in their tax computation. A change from the cash basis to accruals accounting brings in transitional adjustments; see cash basis vs accruals accounting.

What mistakes come up most often?

Recognising income only when invoiced, which shifts profit between years whenever billing runs late.
Accruing unbilled time at full charge out rates without considering write downs the business routinely gives.
Counting the same work twice where a payment on account has already been invoiced.
Accruing a contingent or success fee before it is highly probable.
Ignoring the VAT basic tax point on completed jobs that were invoiced weeks later.
Carrying old accrued income forward year after year without checking that it will ever be billed.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.