1. 1
   Introduction to adjusting entries
2. 2
   Accrued income
3. 3
   Accrued expense
4. 4
   Unearned income
5. 5
   Prepaid expense
6. 6
   Depreciation
7. 7
   Bad debts
8. 8
   Adjusted trial balance

Adjusting entry for accrued expense

Pro-Forma Entry

The pro-forma adjusting entry to record an accrued expense is:

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

For Example

For the month of December 2021, Gray Electronic Repair Services used a total of $1,800 worth of electricity and water. The company received the bills on January 10, 2022. When should the expense be recorded, December 2021 or January 2022?

Answer – in December 2021. According to the accrual concept of accounting, 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 it in December then an adjusting entry is necessary.

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 entered into a rental agreement to use the premises of DON's building. The agreement states that VIRON will pay monthly rentals of $1,500. The lease started on December 1, 2021. On December 31 of the same year, 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:

Example 2: VIRON Company borrowed $6,000 at 12% interest on August 1, 2021. 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:

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