Journal Entry for Accrued Expenses

Accrued expenses are expenses that a company has incurred but has not yet paid or recorded through a formal invoice.

How to Record Journal Entry for Accrued Expenses?

Accrued expenses are expenses that a company has incurred but has not yet paid or recorded through a formal invoice. They are recognized in the accounting period in which they are incurred to adhere to the accrual accounting principle. This ensures that expenses are matched with the revenues they help generate, even if payment has not yet been made.

Recording Accrued Expenses

Scenario: Your company incurred $1,500 in utilities expenses in August, but the bill will not be received or paid until September.

Journal Entry for Accrued Expense

1. Debit Expense Account: This recognizes the expense incurred in the current period, reflecting the cost associated with the period in which it was incurred.
2. Credit Accrued Expenses (or Accounts Payable): This creates a liability to acknowledge that the company owes money for expenses that have been incurred but not yet paid.

Detailed Journal Entry:

For Accrued Expense:

• Debit Utilities Expense: $1,500
  • Explanation: This entry records the expense that has been incurred in the current accounting period (August). The expense is recognized even though the bill has not yet been received.
• Credit Accrued Expenses (or Accounts Payable): $1,500
  • Explanation: This entry establishes a liability for the amount owed. It reflects that the company will have to pay this amount in the future.

Complete Journal Entry:

Debit: Utilities Expense                     $1,500
   Credit: Accrued Expenses (or Accounts Payable)     $1,500

When Payment is Made

Scenario: In September, you receive and pay the utility bill of $1,500.

Journal Entry for Payment:

1. Debit Accrued Expenses (or Accounts Payable): This clears the liability previously recorded.
2. Credit Cash (or Bank): This reflects the outflow of cash used to settle the bill.

Detailed Journal Entry:

For Payment:

• Debit Accrued Expenses (or Accounts Payable): $1,500
  • Explanation: This entry reduces the liability because the payment has been made.
• Credit Cash (or Bank): $1,500
  • Explanation: This entry records the payment made to settle the expense, reducing the company’s cash or bank balance.

Complete Journal Entry:

Debit: Accrued Expenses (or Accounts Payable) $1,500
   Credit: Cash (or Bank)                              $1,500

Summary of Accrued Expense Entries

1. At the Time of Incurred Expense (before payment):
   • Debit: Expense Account (e.g., Utilities Expense)
   • Credit: Accrued Expenses (or Accounts Payable)
2. When Paying the Expense:
   • Debit: Accrued Expenses (or Accounts Payable)
   • Credit: Cash (or Bank)

Additional Considerations

• Matching Principle: Recording accrued expenses ensures that expenses are recognized in the period in which they are incurred, aligning with the matching principle of accounting, which matches expenses with the revenues they help generate.
• Financial Statements Impact: Accrued expenses are reported on the balance sheet as liabilities and on the income statement as expenses, ensuring that financial statements accurately reflect the costs associated with the current period.
• Reconciliation: Regularly reconcile accrued expense accounts to ensure that all expenses are properly recorded and that payments are tracked and settled correctly.

By accurately recording accrued expenses, a company ensures that its financial statements present a true and fair view of its financial position and performance for the accounting period.