An accrued expenses journal entry is made in the books when recording the expenses incurred over one accounting period that has not been actually billed or paid for in that accounting period. An accrued expense journal entry is, therefore, only entered when using accrual accounting. This is because when using the accrual method in bookkeeping, you record expenses as you incur them and not when you exchange cash.
However, under the cash-basis method of accounting, you only record transactions when cash changes hands which usually results in the overstatement and understatement of income and account balances. Accrual accounting differs from cash basis accounting, therefore, when making any accrued expenses journal entry in the books, you must use the accrual method and ensure you record the transaction according to the accounting debit and credit rules. In this article, we will discuss how to make an accrued expenses journal entry with some examples.
Understanding accrued expenses
Accrued expenses (accrued liabilities) are expenses that have been incurred but haven’t been billed or paid for. A typical example of an accrued expense is when a firm purchases office supplies from a vendor but have not yet received an invoice for the purchase. Other examples of accrued expenses include warranties on products or services received, interest payments on loans, and taxes that have been incurred or obtained, but no invoices have been received nor payments made. Also, employee commissions, bonuses, and wages are accrued in the period they occur although the actual payment is made in the following accounting period.
Generally, you accrue an expense in one period and pay the expense in the next period. This means that you record the expense in your books at the end of an accounting period. And in the next period, you reverse the accrued expenses journal entry when you settle the debt. This accrued expenses adjusting entry shows the expense has been paid eliminating the initial recorded owed debt.
Accrued expenses are reported as liabilities on a company’s balance sheet and not as expenses. Also, it is important to note that an accrued expense can be an estimate and may differ from the supplier’s invoice which will arrive at a later date. This is why following the accrual method of accounting, expenses are recognized when they are incurred, and an accrued expenses adjusting entry is done when they are paid.
From this session, we know that accrued expenses is recorded as a liability and we also know it has an adjusting entry when the debt has been paid. However, as a liability what would an accrued expense journal entry be? Is it a debit or credit entry, being that it represents a company’s obligation to make future cash payments? In order to answer this, let’s look at the debit and credit rules that are applicable to accrued expenses entry.
See also: Notes receivable debit or credit?
Debit and credit rules (applicable to accrued expenses journal entry)
In bookkeeping, when recording a transaction, an amount must be entered as a debit entry in one account and the same amount must be entered as a credit entry in another account. This means that, for every transaction, the total of the debit and credit entries must always equal each other in order for the transaction to be in balance. This is one of the most crucial debit and credit rules, the others are:
- Assets, expenses, and dividends accounts increase with a debit entry and decrease with a credit entry
- Equity, liabilities, and revenue accounts increase with a credit entry and decrease with a debit entry
According to these rules, we record equity, liabilities, and revenue accounts as credit entries. This means that the journal entry of liabilities like accrued expenses will be a credit entry. An accrued expenses journal entry has to do with accrual accounting which is built on a timing and matching principle.
Therefore, when you accrued an expense, you owe a debt, and the entry has to be treated as a liability. However, when you pay the amount due, you reverse the original entry (that is you have to debit the accrued expense account to reduce it) so that the adjusting accrued expense entry reflects the payment of the expense.
Check out: Is Investment Debit or Credit?
Accrued expenses journal entry explained
As you accrue expenses or liabilities, remember that it is money you’ll need to pay at a later date. Hence, you keep track of accrued expenses by making two entries on the general ledger- one debit journal entry to report the expense and one credit journal entry to report the accrued expense as a liability.
Accrued expenses journal entry for when an expense is incurred
A company or business incurs an expense at the end of the accounting period. When they owe a debt but have not yet been billed, they need to make an accrued expense entry in their books. Usually, the accrued expenses journal entry is a debit to the Expense account (the debit entry increases your expenses) and a credit to the Accrued expenses account (the credit entry increases your liabilities). In order to record the expense incurred which is the initial recording of accrued expenses, the debit and credit journal entry will be:
Sample entry of accrued expenses when an expense is incurred
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. When you make these entries, your expenses on the income statement will increase and the liabilities on the balance sheet will increase as well.
Accrued expenses journal entry for when the expense is paid
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. This is an accrued expense journal entry reversing. Therefore, in order to make this entry, you have to debit the Accrued expenses account in order to decrease your liabilities. This is because when you pay a debt, you have fewer liabilities. Then, you credit a Bank (or Cash) account; this credit entry would decrease the amount of cash you have.
Hence, in order to record accrued expenses adjusting entry, the journal entry will be:
Sample entry of accrued expenses when the expense is paid
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 or Bank account. When you make these entries, your liabilities on the balance sheet will decrease and because cash was paid, the balance sheet will show a decrease in cash.
If you don’t make an adjusting entry for accrued expenses after paying the expenses, you’ll have some issues in your books. The following are likely to happen:
- Net income will be overstated and expenses will be understated on the income statement
- On the balance sheet, liabilities will be understated
- Your financial reports will seem like you have more money than you actually do
Hence, it is very important that you ensure you keep your entries up-to-date each time you settle a liability.
See also: Utilities payable debit or credit?
Accrued expenses journal entry examples
How do you record an accrued expense journal entry? Accrued expenses are recorded by debiting the appropriate expense account and crediting the accrued expenses account. After this, a second journal entry must be done in the subsequent accounting period when the expense has been paid in order to reverse the entry. Therefore, the debit and credit entry when adjusting an accrued expense journal entry would be a debit to the accrued expenses account and a credit to the cash account.
You can gain accrued expenses in a number of ways. Here are some common examples to show how to record such accrued expenses journal entry:
Accrued interest is an example of accrued expenses. You incur accrued interest when you owe interest on an outstanding loan that hasn’t been billed by the end of the accounting period. For instance, if ABC company paid interest on the outstanding term loan of $1,000,000 for May 2022 on 5th June 2022.
Let’s assume the interest is charged at 1% per month, and ABC Company reported the accounting year at the end of 31st May 2022. This means that ABC company will record the interest expense of $10,000 (i.e 1% x $1,000,000) in the financial statements of the financial year ending on 31st May 2022, even though the interest was paid in the next accounting period.
Going by this illustration, an example of accrued expense journal entry for this would be:
The accrued expenses journal entry to record accrued interest
|31st May 2022||Interest Expense||$10,000|
|Accrued expense (accrued interest)||$10,000|
This accrued journal entry will be reversed on the day the interest is paid which is 5th June 2022, and the following accrued adjusting journal entry will be recorded in the subsequent financial year:
Journal entry for accrued expenses to record interest paid
|5th June 2022||Accrued expense (accrued interest)||$10,000|
Accrued wages are an example of accrued expenses. In some organizations, accrued wages are reported in their balance sheet because their employees earn wages but are paid in arrears, which is in the subsequent period.
For instance, if the work done by employees of Jotscroll media company is paid in the next month. The accrued expenses journal entry of say $5,000 will be recorded by debiting the Wages and Salaries Expenses account and crediting the Accrued Expenses account. An example of accrued expense journal entry for this would be:
Accrued expense journal entry to record accrued wages
|31st January 2023||Wages and Salaries Expenses||$5,000|
Then, when the wages are paid the next month an offsetting entry will be made by debiting the Accrued expenses account and crediting the Cash account. That is:
Journal entry for accrued expenses to record wages paid
|2nd February 2023||Accrued expenses||$5,000|
Accrued payroll tax
Accrued payroll tax is another example of an accrued expense. This is incurred when a company withholds employment taxes from employee wages but owes them till the next accounting period. If for instance, a company withholds $1,000 for employment taxes and doesn’t intend to pay until the next accounting period, this is what the accrued expense entry would look like on its ledger:
Accrued expenses journal entry to record accrued tax expense
|31st December 2022||Tax expense||$1,000|
Assuming the company pays the entire tax bill with cash, this is what the adjusting entry will look like:
Journal entry for accrued expenses to record tax paid
|2nd January 2023||Accrued expenses||$1,000|
Accrued goods and services
Accrued goods or services is also reported as accrued expenses. This is when you receive a good or service, but the vendor doesn’t bill you until a later date. For instance, assuming a purchase order is placed on July 1 for furniture, and the furniture is received on July 28. An invoice for $7,000 is received on August 1 and paid for on August 30. The accrued expense journal entry of $7,000 has to be recorded as of July 31 to ensure that the expense is properly accounted for in the current accounting period.
An accrued expense journal entry example of how to report this $7000 will be:
Accrued expense journal entry to record accrued goods
Journal entry for accrued expenses to record goods paid
|August 30||Accrued expenses||$7,000|
Accrued utilities are another example of accrued expenses. This is reported as the used utilities for your business that haven’t yet been billed. Take, for instance, your business wants to accrue a $3,000 utility invoice to have the expense hit in June.
This means your business’s accrued expenses journal entry in June will be a debit entry to the Utility Expenses account and a credit entry to the Accrued expenses account. An accrued expense journal entry example for this would be:
Accrued expenses journal entry to record accrued utility
On July 1st, your business will reverse this entry by debiting the Accrued Expenses Account and crediting the Utility Expenses Account. As your business pays the invoice in July, a debit entry to Utility Expense and a credit entry to Cash will then offset the two entries made to Utility Expense in July. That is:
Journal entry for accrued expenses to record utility paid