Accrued Expense

By: Felix Domingo, CPA, CMA

felixacct@gmail.com
+63 956 417 2033
What are Accrued Expenses?

An accrued expense is an expense that has been incurred, but for which there is not yet any expenditure
documentation.

In place of the documentation, a journal entry is created to record an accrued expense, as well as an
offsetting liability. In the absence of a journal entry, the expense would not appear at all in the entity's
financial statements in the period incurred, which would result in reported profits being too high in that
period.

In short, accrued expenses are recorded to increase the accuracy of the financial statements, so that
expenses are more closely aligned with those revenues with which they are associated.
Presentation of Accrued Expenses

An accrued expense is usually expected to be paid for within quite a short period of time, such as the next
month.

When the settlement period is within the next year, the liability associated with an accrued expense is
presented in the balance sheet as a current liability. If the expected settlement date will be more than a
year in the future, the liability is instead classified as a long-term liability.
Examples of Accrued Expenses

Examples of expenses that are commonly accrued include the following items:

● Interest on loans, for which no lender invoice has yet been received
● Goods received and consumed or sold, for which no supplier invoice has yet been received
● Services received, for which no supplier invoice has yet been received
● Taxes incurred, for which no invoice from a government entity has yet been received
● Wages incurred, for which payment to employees has not yet been made

An example of an accrued expense is a situation where a company receives office supplies from a supplier
near the end of a month, but has not yet received an invoice from the supplier by the time the company
closes its books for the month.

To properly record this expense in the month of receipt, the accounting staff records an expense in the
supplies expense account with a debit in the amount that it expects to be billed by the supplier, and records
a credit to an accrued expenses liability account.

Thus, if the amount of the office supplies were P 500, the journal entry would be a debit of P 500 to the
office supplies expense account and a credit of P 500 to the accrued expenses liability account.
Examples of Accrued Expenses

The P 500 entry would reverse in the following month, with a credit to the office supplies expense account
and a debit to the accrued expenses liability account.

The company then receives the supplier invoice for P 500, and records it normally through the accounts
payable module of the accounting software, resulting in a debit to the office supplies expense account and
a credit to the accounts payable account. The net result in the following month is therefore no new expense
recognition at all, with the liability for payment shifting to the accounts payable account.
Accounting for Accrued Expenses

The essential accounting for accrued expenses is to debit whatever the expense may be, and credit the
accrued expenses liability account. This entry is usually set to automatically reverse in the following
reporting period with a reversing entry, to be replaced by the supplier invoice that did not arrive in the
preceding period. These actions result in the expense being recognized as early as possible. The following
examples show how to record an accrued expense under different circumstances:

1. Office supplies received and there is no supplier invoice as of month-end: Debit to office supplies
expense, credit to accrued expenses.
2. Employee hours worked but not paid as of month-end: Debit to wages expense, credit to accrued
expenses.
3. Benefit liability incurred and there is no supplier invoice as of month-end: Debit to employee benefits
expense, credit to accrued expenses.
4. Income taxes are accrued based on income earned. Debit to income tax expense, credit to accrued
expenses.

The first three entries should reverse in the following month. Income taxes are typically retained as accrued
expenses until paid, which may be at the end of a quarter or year.
Practical Application of Accrued Expenses

Realistically, the amount of an expense accrual is only an estimate, and so is likely to be somewhat
different from the amount of the supplier invoice that arrives at a later date. Consequently, there is usually a
small additional amount of expense or negative expense recognition in the following month, once the
journal entry reversal and the amount of the supplier invoice are netted against each other.

From a practical perspective, immaterial expenses are not accrued, since it requires too much work to
create and document the related journal entries. Further, a large number of accrued expense journal entries
will slow down the month-end closing process.
Accrued Expenses vs. Prepaid Expenses

A prepaid expense is the reverse of an accrued expense, since a liability is being paid before the
underlying service or asset has been consumed. Consequently, a prepaid asset initially appears on the
balance sheet as an asset. It is typically presented as a short-term asset, since most prepaid expenses will
be consumed within a short period of time.
Accrued Expenses vs. Accounts Payable

Accrued expenses are expenses that have already been incurred, but for which no billing documentation
has yet been received. This differs from accounts payable, which are obligations to pay, based on invoices
received from suppliers and recorded.

There are two differences between the two concepts.

First, an accrued expense has no supporting invoice from a supplier, while an account payable is supported
by a supplier invoice, and

Second, an accrued expense specifically relates to an expense, which is not necessarily the case for an
account payable. For example, an account payable might be to pay for a fixed asset that has been
delivered by a supplier; a fixed asset is not classified as an expense, though it will eventually be charged to
expense over its useful life through ongoing depreciation.
Accrued Expenses Amortization Spreadsheet

[Company Name]
Accrued Expense Amortization Schedule
As of 31.Jan.2022

Sno Description 1.01.2022 Expensed Reversal 31.01.2022

01. Salary - Dec 2021 55,000.00   (55,000.00) 0.00
02. Leave Salary Provisions 102,200.00 107,310.00 (102,200.00) 107,310.00
03.          
04.          
05.   157,200.00 107,310.00 (157,200.00) 107,310.00
Reconciliation of Accrued Expenses

1. At the end of each month, print the detail for the accrued expenses account.

2. Match the line items in the account to the supporting detail in the accrued expenses amortization
spreadsheet.

3. If the supporting detail does not match the account balance, adjust the account balance with the
approval of the approver.
Capabilities and limitations (continued…)