Accrued expenses

An accrued expense is an item of expense that has been incurred during the accounting period but has not yet been paid for.

In order to ensure that the full expenses of the period have been included in the income statement, the accountant must ensure that the expense accounts include not only those items that have been paid for during the period but any outstanding amounts due for expenses.

For example:
Michel Scofield’s business has an accounting year end of 31 Decemeber 20X8. He rents factory space at a rental cost of $5,000 per quarter payable in arrears. During the year to 31 December 20X8 his cash payments of rent have been as follows:
(the accrued expenses)                                                     $
31 March (for quarter to 31 March 20X8)               5,000
29 June (for quarter to 30 June 20X8)                    5,000
2 October (for quarter to 30 September 20X8)      5,000

The final payment due on 31 December 20X8 for the quarter to that date was not paid until 4 January 20X9.

So an accrued expense has been incurred during the accounting period. The accrued expenses are shown as a item of liabilities in the balance sheet. It’s an incurred expense but not paid for.

At 31 December 20X8,

$
Dr operating expenses                                                    5,000
Cr accrued expenses(the factory space rent )         5,000

Here, there is an amount of $5,000 shown in the crdit of accrued expenses, it’s an item of liabilities shown in the balance sheet.

Related posts:

1. Prepaid expenses
2. Income statement example
3. Accruals concept
4. Cash flow statement template