Accrued Expenses in Accounting (with examples)

by Fahad Zar
5 minutes read

What are Accrued Expenses?

An accrued expense in accounting is a type of expense that the company has incurred but not yet paid for. For example, we consume electricity and pay the bill at the end of the month. The electricity remains an accrued expense throughout the month until it’s settled. In the same way, businesses incur a variety of expenses for which no payment is made in advance, and these expenses are termed accrued expenses.

There are two aspects of accrued expenses that you need to understand. Firstly, it’s an expense and at the same time, it’s a liability due to the fact that it’s not been paid yet and the company has to pay it at some point in time.

A specific operational example of an accrued expense in accounting would be the salaries of employees of a company on the 25th of the month. The employees have worked for 25 days and the company has to pay them after a few days. This expense has been incurred by the company for the most part but hasn’t been paid yet.

Therefore, expenses that have already been incurred fully or partially and which haven’t resulted in an outflow yet are categorized as accrued expenses.

The accrued expense is a concept of accrual accounting that states that expenses should be recorded when incurred and not when paid for. Therefore, accrued expenses are recorded in the period to which they relate whether or not the cash outflow for that particular expense occurs in the same period.

Accounting For Accrued Expenses

Accrued expenses are accounted for in the following manner.

For example,

Total salaries pending at the year-end = $50,000

Now, we know that employees have already worked and the company has incurred the salary expense. Therefore, the expense relates to the current year and should be charged to the statement of profit or loss.

The second key point is knowing that at the same time, it’s a liability for the company and the company has to pay the salary at some point in time. Therefore, liability is recorded in the statement of financial position.

The double entry to record accrued expenses will be:

Dr Salary Expense (Profit/Loss)$50,000
Cr Salary Payable (Balance Sheet)$50,000

Explanation: The company has incurred an expense (salary) but not yet paid for. Therefore, to record the accrued expense in the company’s books, you need to make TWO entries. The first one is to record a debit entry in profit or loss, that is salary expense and the corresponding credit entry with the same amount in the balance sheet, that is salary payable.

Now, when the company clears the liability meaning that when the employees are paid, we have to make another double-entry to reflect the transaction in our books. The following double-entry is recorded.

Dr Salary Payable (Balance Sheet)$50,000
Cr Cash (Profit/Loss)$50,000

As you can see, the first entry in the above double-entry is the opposite of what was recorded in our first entry. The balance sheet liability recorded in our first entry has been reversed.

How do the Credit & Debit work in Accruals?

The concept of credits and debits remain the same no matter which accounting principle or standard is followed. In our example, we have debited profit or loss when recording the accrued expense for the first time. It is because an increase in expense results in a debit entry.

The corresponding liability entry recorded is a credit entry and it is because the increase in liabilities results in credit entries and any decrease will result in a debit entry. To understand the concept here are some interesting accounting mnemonics;

D-E-A-D

D-E-A-D means debits increase expenses, assets, and dividends. The mnemonic helps you remember easily whether to credit or debit an expense, asset, or dividend in various entries. It can also be used the other way around. For example, if an increase in expense has occurred, you know from the D-E-A-D, it should be debited and any decrease would result in a credit entry.

Another helpful accounting mnemonic for double-entry to remember is R-E-L-I-C which means Revenues, Equity and Liabilities are increased with credits. That simply means, if an increase occurs in revenues, equity or liabilities, know that it needs to be credited.

For example, if a company makes a sale, that is an increase in revenue, you will know from the R-E-L-I-C that it needs to be credited. There are several other accounting mnemonics that make the job much easier for students and accounting enthusiasts but these TWO are the list toppers and are great for remembering when to credit and when to debit.

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1 comment

Sheriff March 20, 2021 - 10:23 am

Loved the D-E-A-D and R-E-L-I-C!

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