What is Accrued Expense?
When a company incurs expenses while the payment has not been made, such expenses shall be recorded as accruals. Thus, these accruals are called accrued expenses. Therefore, we can basically define the accrued expenses as the liability which results from the goods or services that have been received; however, the payment has not been made.
In real practice, we often see various expenses incurred and considered as accrued expenses. For example, interest expenses incurred not yet paid, salary expense not yet paid or salary payable, accrued bonus, utility expenses, etc…
Sometimes, the account name for the accrued expenses can be varied in accordance with its nature of the expense. For example, the accrual of salary expense not yet paid is practically called salary payable while the accrual for interest expense is called interest payable.
As mentioned, these expenses, typically, occur very often in real business practice and the accounting treatment, as well as the expense realization, should be properly carried out.
When a company incurs expenses, it creates an obligation in order to make the payment for such expenses. This obligation is the liability that the company possesses and shall be treated and recorded as accrued expenses regardless of payment has not been made.
The accrued expenses account is presented in the Balance Sheet under current liabilities if the payment term is within a twelve-month period; however, if the payment is more than the twelve-month period, such accruals shall be presented as long-term liabilities.
In this article, we cover the journal entry for accrued expenses with examples of the accrued expense transactions.
So let’s get started in the later section below.
Journal Entry for Accrued Expenses
The journal entry for accrued expenses is straightforward. It is part of the adjusting entries in the accounting cycle that each accountant shall be carried out as part of their closing process.
When a company incurs expenses while the payment has not been made, the journal entry for such accrued expenses shall be recorded as follow:
|Accrued expenses (as part of liabilities)||XXX|
|(To record expense incurred as accrual)|
After the company has made the payment, the journal entry for such payment will be as follow:
|(To record payment made on accrued expenses)|
Please note that, at the time of payment, the debit entry is not an expense. It is the offset against the accrued expense (liability) that the company has recorded as an accrual. Therefore, at the time of payment, nothing impacts the income statement.
Assume that as of 31 March 20X9, ABC Co has not made the payment on salary expenses of 2 staff for a total of $10,000.
Even though the salary payment has not been made, but ABC Co already incurred the salary expense. Thus, ABC Co shall need to record the accrued salary expense as part of its adjusting entries during the closing process.
The journal entry for accrued salary expense or salary payable is as follow:
|(To record accrued salary expense)|
On 02 April 20X9, ABC Co made the payment on such salary accrual. Thus, the journal entry to record the payment on the salary payable is as follow:
|(To record payment on salary payable)|
At the end of 31 March 20X9, ABC Co has incurred an interest expense on its bank loan for $500. However, based on the loan amortization schedule, the due date of the payment on both principal and interest is on 03 April 20X9.
Thus, at the end of 31 March 20X9, ABC Co shall need to record the accrued interest expense incurred regardless of payment has not been made.
The journal entry for accrued interest expense is as follow:
|(To record accrued interest expense)|
Then, for the subsequent payment made on 3 April 20X9, the journal entry for such interest payment is as follow:
|(To record payment of interest which was accrued on 31 March 20X9)|
The accrued expenses journal entry is very important as part of the adjusting entries in the accounting cycle of the closing process. Such accrued expenses are considered as liabilities and shall be presented in the balance sheet as part of the liabilities section.