Adjusting Entries: Accrued Expenses: Videos & Practice Problems

Accrued expenses are liabilities that a company incurs when it receives a benefit but has not yet paid for it. These expenses are recorded in the accounting period in which they are incurred, even if the cash payment will be made in a future period. Common examples include wages earned by employees but not yet paid, interest on loans, and utilities used but not yet billed. Accrued expenses ensure that financial statements accurately reflect the company's financial obligations and expenses, adhering to the matching principle of accrual-basis accounting.

To record an accrued expense, you need to make an adjusting journal entry at the end of the accounting period. First, debit the expense account to recognize the incurred expense. For example, if an employee earns $100 per day and works three unpaid days, you would debit Wage Expense for $300. Next, credit the accrued expense liability account to reflect the obligation to pay. In this case, you would credit Accrued Wage Expense for $300. This entry ensures that the expense is matched with the revenue of the same period, following the matching principle.

Accrued expenses are considered liabilities because they represent obligations that the company has incurred but has not yet paid. When a company incurs an expense, it receives a benefit, such as employee labor or utility services, but the cash outflow has not yet occurred. This creates a liability, as the company is obligated to pay for the benefit received in the future. By recording accrued expenses as liabilities, the company ensures that its financial statements accurately reflect its financial obligations and adhere to the accrual-basis accounting principles.

The matching principle is an accounting concept that requires expenses to be recorded in the same period as the revenues they help generate. In relation to accrued expenses, this principle ensures that expenses are recognized when they are incurred, not when the cash payment is made. For example, if an employee works in December but is paid in January, the wage expense is recorded in December to match the revenue earned in that period. This principle provides a more accurate representation of a company's financial performance and obligations.

Sure! Let's say an employee earns $100 per day and the last pay date was December 28th. The employee worked on December 29th, 30th, and 31st but hasn't been paid yet. The company needs to record an accrued wage expense for these three days. The adjusting entry on December 31st would be:

Debit Wage Expense: $300

Credit Accrued Wage Expense: $300

This entry recognizes the $300 wage expense incurred in December, even though the payment will be made in January. When the payment is made, the company will debit Accrued Wage Expense and credit Cash to remove the liability and reflect the cash outflow.