Accrued Expense Journal Entry

Journal Entry For Accrued Expenses

Accrued expense journal entry is passed to record the expenses which are incurred over one accounting period by the company but not paid actually in that accounting period. Here the expenditure account is debited and the accrued liabilities account is credited. When the company settles its obligation with cash, the accrued liabilities account is debited and the accrued expense account is credited.

Accrued expense refers to the expense that has already incurred but for which the payment is not made. This term comes into play when in place of the expense documentation, a journal entry is made to recognize an accrued expense in the income statement along with a corresponding liability that generally categorizes as a current liability in the balance sheet.

Accrued Expense Journal_Entry

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Source: Accrued Expense Journal Entry (wallstreetmojo.com)

Example of Accrued Expense Journal Entry

Let’s say a company XYZ Ltd that has paid interest on the outstanding term loan of $1,000,000 for March 2018 on 5th April 2018. The interest is charged at 1% per month. Determine the accrued expense journal entry for the example transaction given that XYZ Ltd reported accounting year at the end of 31st March 2018.

As per the matching concept, XYZ Ltd will record the interest expense of $10,000 (= 1% * $1,000,000) in the financial statements of the financial year ending on 31st March 2018, even though the interest was paid in the next accounting period, because it is related to the period ending on 31st March 2018. T

he following accounting entry will be recorded to account for the interest expense accrued:

31st March 2018DebitInterest Expense$10,000
CreditInterest Payable$10,000

The accounting entry will be reversedEntry Will Be ReversedReversing entries refer to those journal entries passed in the current accounting period to offset the entries for outstanding expenses and accrued income recorded in the immediately preceding accounting period.read more on the day of payment of the interest, i.e., 5th April 2018, and the following accounting entry will be recorded in the subsequent financial year:

05th April 2018DebitInterest Payable$10,000
CreditBank$10,000

Advantages

Essential Points to Note about Accrued Expense Journal Entry

A company usually recognizes an increase in accrued expenses immediately as it occurs. It is credited to accrued expenses on the liability side of the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more. The increase in accrued expense is complemented by an increase in corresponding expense account in the income statement. Hence, the company will then debit the expense account and insert it as an expense line item in the income statement. Therefore, an increase in accrued expense has a reducing effect on the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more.

On the other hand, a decrease in accrued expenses happens when a company pays down its outstanding accounts payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more on a later date. To recognize a decrease in accrued expenses, a company will debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more the accounts payable to decrease the accounts payable on the liability side and will credit the cash account on the asset side by the same amount. It is to be noted that the cash paid in the current period is not an expense for this period because the corresponding expense has happened and subsequently recorded in the previous accounting period. Therefore, a decrease in accrued expensesAccrued ExpensesAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more does not affect the income statement.

Conclusion

Although accrued expense is not paid in the same period when it occurs, it is captured in the balance sheet for the period. It is crucial from an accountant’s point of view as it helps him to maintain a transparent accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm.read more in concurrence with the matching principle. Also, from an investor’s perspective, accrued expense helps in ascertaining the accurate picture of the company’s profit.

This article has been a guide to Accrued Expense Journal Entry and its meaning. Here we discuss Accrued Expense Journal Entry examples along with advantages & disadvantages. You can learn more about accounting from the following articles –

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