Adjusting Entries for Accrued Expenses

Accrued expenses refer to those that are already incurred but have not yet been paid. At the end of period, accountants should make sure that they are recognized as expenses.

Here's the rule. If a company incurred, used, or consumed all or part of an expsense, that expense of part of it should be properly recognized even if it has not yet been paid.

If such has not been recognized, then an adjusting entry is necessary.

Pro-Forma Entry

The pro-forma entry for accrued expense is:

mmm dd Expense account* x,xxx.xx  
    Liability account**   x,xxx.xx

*Appropriate expense account such as Utilities Expense, Rent Expense, Interest Expense...
**Appropriate liability account (Utilities Payable, Rent Payable, Interest Payable, Account Payable, etc.)

For Example

For the month of December 2013, Gray Network Services used a total of $1,800 worth of electricity and water. The company received the bills on January 10, 2014. When should the expense be recorded, December 2013 or January 2014?

Answer -- in December 2013. According to the expense recognition principle, expenses are recognized when incurred regardless of when paid. The amount above pertains to utilities used in December. Therefore, if no entry was made for this expense in December then an adjusting entry is necessary.

Dec 31 Utilities Expense 1,800.00  
    Utilities Payable   1,800.00

In the adjusting entry above, Utilities Expense is debited to recognize the expense and Utilities Payable to record a liability since the amount is yet to be paid.

Here are some more examples.

More Examples: Adjusting Entries for Accrued Expense

Example 1: VIRON Company enters into a rental agreement to use the premises of DON's building. The terms state that VIRON will pay monthly rentals of $1,500 at the end of every month. The lease started on December 1, 2013. On December 31, the rent for the month has not yet been paid and no record for rent expense was made.

In this case, VIRON Company already incurred (consumed/used) the expense. Even if it has not yet been paid, it should be recorded as an expense. The necessary adjusting entry would be:

Dec 31 Rent Expense 1,500.00  
    Rent Payable   1,500.00

Example 2: VIRON Company borrowed $6,000 at 12% interest on August 1, 2013. The amount will be paid after 1 year. At the end of December, the end of the accounting period, no entry was entered in the journal to take up the interest.

Let's analyze the above transaction.

VIRON will be paying $6,000 principal plus $720 interest after a year. The $720 interest covers 1 year. At the end of December, a part of that is already incurred, i.e. $720 x 5/12 or $300. That pertains to interest for 5 months, from August 1 to December 31. The adjusting entry would be:

Dec 31 Interest Expense 300.00  
    Interest Payable   300.00

An expense is recognized when it is incurred regardless of when it is paid. What you need to remember here is this: when it has been consumed or used and no entry was made to record an expense, then there is a need for an adjusting entry.

Online resource for all things accounting. more
Search this Site
Featured in the Blog
Feedback
Questions, comments and suggestions?
Contact us here.
Copyright © 2014 Accountingverse.com - Your Online Resource For All Things Accounting
Terms of Use | Home | About | Contact