Accrued Expense Journal Entry

What Are Accrued Expenses?

Accrued expenses, or accrued liabilities, are costs a company knows it owes but hasn’t paid yet. Think of it like this: you know you have to pay your rent at the end of the month, but you haven’t handed over the cash yet. The company records these expenses in the period they happen, even if the bill hasn’t arrived. For example, if a company buys supplies but hasn’t gotten the invoice, it still notes the expense as accrued.

You’ll find accrued expenses listed as current liabilities on the balance sheet. This just means the company knows it has to pay up soon.

Why Bother with Accrual Accounting?

Accrual accounting is the go-to method under generally accepted accounting principles (GAAP). It records expenses when they happen, not when the money changes hands. The idea is to give a clearer picture of a company’s finances by matching income with the expenses that helped earn it, all in the same period.

When a company recognizes an accrued expense, it debits the expense account and credits an accrued liability account. This keeps the books straight by recording expenses when they actually happen. But, there’s a catch: you need to make another journal entry in the next period to reverse the first one.

Accrual accounting is more work than the cash method, where you only record expenses when you pay them. But it’s worth it because it gives a more accurate view of the company’s financial health.

Want to know more about journal entries and why they matter? Check out our articles on what is a journal and journal entry examples.

Recording Accrued Expenses

Accrued expenses are costs that businesses rack up but haven’t paid yet. Getting these expenses down right is key for keeping your financial records straight. Let’s break down how to record these expenses using double-entry bookkeeping and give you some tips for making journal entries.

Double-Entry Bookkeeping

Double-entry bookkeeping is the bread and butter of accounting. It makes sure every transaction hits at least two accounts, keeping the equation balanced: Assets = Liabilities + Equity. For accrued expenses, this method means recognizing both the expense and the liability.

When you record an accrued expense, you do two things:

1. Debit (increase) an expense account.
2. Credit (increase) an accrued liability account.

For example:

• Your company gets hit with a £10,000 utility bill in June but doesn’t get the invoice until July.
• In June, you should log this by debiting the Utility Expense account and crediting the Accrued Liabilities account.

Journal Entries for Accrued Expenses

Recording accrued expenses means making specific journal entries. Here’s how to do it for common situations:

Initial Expense Recognition

When you accrue an expense, you need to record it right away. Here’s a basic example for a utility expense.

Date	Account	Debit (£)	Credit (£)
30 June	Utility Expense	10,000
30 June	Accrued Liabilities		10,000

This entry bumps up the Utility Expense account and creates a £10,000 liability in the Accrued Liabilities account. For more examples, see journal entries examples.

Reversing the Entry

Next period, you need to reverse the accrued expense when the invoice arrives and gets paid. This avoids double-counting. Here’s how to reverse it:

Date	Account	Debit (£)	Credit (£)
1 July	Accrued Liabilities	10,000
1 July	Utility Expense		10,000

This entry lowers the Accrued Liabilities account and offsets the expense from the previous period.

Payment of the Invoice

When you pay the invoice, make another journal entry:

Date	Account	Debit (£)	Credit (£)
15 July	Utility Expense	10,000
15 July	Cash		10,000

This entry shows the actual payment, decreasing the Cash account.

For a deeper dive into journal entries and why they matter, visit our page on what is journal in accounting.

Keeping accurate records with double-entry bookkeeping and well-prepared journal entries helps businesses track accrued expenses effectively. This practice supports better financial management and reporting, crucial for making smart decisions. For more info and examples on journal entries, check out our resources on journal entry examples and accounting general journal entries.

Types of Accrued Expenses

Accrued expenses are a big deal in accounting. They represent costs a company has racked up for goods or services received but not yet paid for. These expenses get recorded through adjusting entries to show liabilities and expenses that still need an invoice. Let’s break down the common categories and examples of accrued expenses.

Common Categories

Accrued expenses usually fall into a few main categories based on different situations. Here are some typical types:

• Salaries and Wages: Money owed to employees for work they’ve done but haven’t been paid for yet.
• Interest: Interest on loans that’s been incurred but not yet paid.
• Taxes: Tax bills that have piled up but haven’t been paid.
• Utilities: Costs for utilities used but not yet billed.
• Employee Benefits: Accrued amounts for benefits like bonuses and commissions.

Examples of Accrued Expenses

Here are some specific examples of accrued expenses and how they’re usually recorded in accounting:

• Interest Payments on Loans: Interest that has built up on a company’s loan but hasn’t been paid yet.
• Employee Commissions, Wages, and Bonuses: These are recorded in the period they occur, even if the actual payment happens later.
• Taxes: Tax bills that have been incurred but are still unpaid.
• Utility Bills: For example, a company might get a utility bill for June in July. To record this, the company would make an accrued expense journal entry in June.

Example Journal Entry for Utility Expense

If a company wants to accrue a $10,000 utility bill for June, the journal entry in June would be a debit to Utility Expense and a credit to Accrued Payables. This makes sure the expense is recognized in the right period.

Date	Account	Debit ($)	Credit ($)
June 30	Utility Expense	10,000
June 30	Accrued Payables		10,000

Accrued expenses show up on a company’s balance sheet as current liabilities, reflecting the company’s obligation to make future cash payments. For more examples and detailed entries, visit our section on journal entries examples.

Understanding and managing these expenses is key for accurate financial reporting and making sure all liabilities are properly accounted for. For more insights on handling accrued expenses, check out our guides on prepaid journal entry and accounting general journal entries.

Keeping Tabs on Accrued Expenses

Keeping track of accrued expenses is key to keeping your financial records straight. This means you need to stay on top of tracking and reversing entries and get a grip on why accrual accounting is a game-changer.

Tracking and Reversing Entries

You gotta reverse those accruals in the next fiscal year to dodge double-counting expenses when they get paid. You can do this by hand or let a system like Prime handle it for you. Prime can automatically reverse the entry in the next accounting period, making sure those accruals are reversed on day one of the new fiscal year.

Reversing entries kick in at the start of a new accounting period. They undo an adjusting entry from the end of the last period. This cuts down on accounting mistakes from double-counting expenses or income and speeds up processing actual invoices in the new period.

Here’s a quick example:

Date	Account	Debit	Credit
31 Dec 2022	Salaries Expense	$5,000
	Accrued Salaries Payable		$5,000
01 Jan 2023	Accrued Salaries Payable	$5,000
	Salaries Expense		$5,000

In this example, the salary expense accrued on December 31st gets reversed on January 1st, so you don’t end up counting it twice when the payment is made.

Why Accrual Accounting Rocks

Accrual accounting beats cash accounting hands down. It gives a clearer picture of your company’s financial health by recognizing revenues and expenses when they happen, not when the cash changes hands. This is super helpful for business decision-makers who need accurate financial data to make smart choices.

Here are some perks:

• Spot-On Financial Accuracy: Accrual accounting makes sure all expenses and revenues are recorded when they happen, giving you a true financial snapshot.
• Better Expense Control: By tracking accrued expenses, companies can manage their liabilities better and be ready for upcoming payments.
• Top-Notch Reporting: Accrued expenses get recorded through journal entries, which then hit the general ledger. This boosts the quality of your financial statements.

For more journal entry examples, check out our article on journal entry examples. Also, dive into managing other types of journal entries like prepayment journal entry or deferred revenue journal entry to get a better handle on accrual accounting.

Knowing how to track and manage accrued expenses is crucial for accurate financial reporting and smart business management. By tapping into the benefits of accrual accounting, companies can get better insights into their financial health and make more informed decisions.