Is accrued expenses debit or credit? Accrued expenses, which is also called accrued liabilities, is an account that reports an expense that has been recognized on the books before the invoice is received and paid for. The yet-to-be-paid expense is recorded in the accounting period in which it is incurred. Therefore, accrued expenses are reported only when using accrual accounting.
In as much as the accrual method of accounting is labor-intensive as it requires extensive journaling, it is a better and more accurate measure of a company’s transactions and events for each period. It gives a more complete picture that helps users of financial statements to understand the present financial health of a company better and predict its future financial position.
Hence, recording accrued expenses in your books enable you to anticipate expenses in advance. You recognize expenses earlier than you are billed so that you can map out the money you owe accurately. However, knowing the right journal entry for accrued expenses is important. This article aims to answer the question of whether accrued expenses is a debit or credit entry.
Accrued expenses explained
Accrued expenses (accrued liabilities) are expenses that have been incurred but haven’t been billed or paid for. In order words, it is a debt that you don’t pay immediately but you’re obligated to pay in the future. One can report an accrued expense in his books if he incurs a debt in a period but doesn’t receive an invoice until a later period. For instance, you may receive goods now and pay for them later (when you receive an invoice). Even though you don’t pay for the goods immediately, you are still obligated to pay the accrued expense in the future.
Hence, accrued expenses account is a type of liability that is similar to accounts payable. Nonetheless, with accrued expenses, we’re talking more about expenses such as interest, salaries, or other expenses that have been incurred at a certain point in time even though the invoice has not been received or the bill paid. Accrued expenses are reversing entries which are temporary entries used to adjust your books between accounting periods.
Therefore, you make an initial journal entry for accrued expenses. But, when you pay the amount due, you reverse the original record with another journal entry. Is accrued expenses debit or credit, since it represents a company’s obligation to make future cash payments? Being a liability, accrued expenses is not a debit but a credit entry; let’s discuss this further.
See also: Why are adjusting entries necessary?
Is accrued expenses debit or credit?
Accrued expenses are not recognized as expenses but as liabilities. Therefore, accrued expenses is not a debit but a credit entry when you first incur the expense and plan to pay for it in a future accounting period. However, when you pay part or all of the expenses, you debit the accrued expenses account to reflect in the books that the debt has been cleared.
This means that in order to record accrued expenses in your books, you must make two opposite but equal entries for each transaction. Accrued expenses are not expenses, rather it means you are owing. Therefore, accrued expenses will work with two accounts- the expense and liability accounts.
According to the accounting debit and credit rules, a debit entry will increase an expense account, and a credit entry will decrease an expense account. On the other hand, a credit entry will increase a liability account, and a debit entry will decrease a liability account. This means that a credit entry will increase an Accrued expense account and a debit entry will decrease it. Hence, accrued expenses is a credit and not a debit entry. That is, the journal entry for accrued expenses would be:
Debit and credit journal entry for accrued expenses to record incurred expenses
As seen from the journal entries above, a debit entry is made to the Expense account and a credit entry is made to the Accrued expenses account. Hence, the initial journal entry for accrued expenses is not a debit but a credit entry.
However, when you pay the expense at the beginning of the next accounting period, you have to reverse the initial accrued expenses journal entry in your books. That is, you credit a Bank (or Cash) account and debit the accrued expenses account:
Debit and credit journal entry for accrued expenses to record payment of expenses
As seen from the accrued expenses adjusting entry above, a debit entry is made to the Accrued Expenses account to show that the expense has been paid and a credit entry is made to the Cash account. Hence, the reversal journal entry for accrued expenses is a debit and not a credit entry.
Why accrued expenses is not a debit but a credit entry
Accrued expenses is not a debit but a credit entry because it is reported as a liability on a company’s balance sheet and not as an expense. An accrued expense is usually expected to be settled within quite a short period of time, like the next month. If the settlement period is within the next year, the debt associated with an accrued expense is reported in the balance sheet as a current liability. However, if the expected settlement date will be more than a year in the future, the debt is rather reported as a long-term liability.
Nonetheless, whether it is recorded as a current or long-term liability, accrued expenses debit, or credit entries must be in accordance with the accounting golden rules for reporting liabilities. According to the debit and credit rules, we record equity, liabilities, and revenue accounts as credit entries and not debit entries. Therefore, in accordance with that, liabilities such as accrued expenses will be recorded not as a debit but as a credit entry.