Image of a man holding a clock next to text Accrued Expenses - It's a Liability Clock

Accrued Expenses - TICK TOCK, it's a LIABILITY CLOCK

Poof! Gone!

Hocus, Pocus...I'm BROKUS!

That's how quickly money goes.

Think of the Electricity being used by you or the Rent to be paid for your apartment.

These are LIABILITIES accumulating each day.

Hell....it's like MONEY is being spent constantly!

Depressing. I know.

But my goal is not to depress you.

It is to TEACH YOU that the SAME CONCEPT applies to companies.

Expenses are constantly ACCRUING for Businesses.

It's part-n-parcel of running a Business.

When a company has spent on something but has not paid for it yet, it is called an ACCRUED EXPENSE.

And, Accrued Expenses are accruing constantly!

The amount that the company owes as Accrued Expenses can be found on the company's Financial Statement called The Balance Sheet under the LIABILITY (Mostly Current Liability) Section.

Let me explain with a few examples.

Examples of Accrued Expenses

Most Employees get paid after they work. So, Staff could have worked X no. of days (15,20, etc.) and still not been paid their Salary due at the end of the month. This Expense would appear as a Salary Payable or Accrued Expense on a companies books since the Expense has occurred, but payment has not been made.
Interest on Loans that have accrued but not yet been paid is an Accrued Expense (many times referred to as Interest Payable on the Balance Sheet)
Utility Bills such as Electricity and Phones bills are often Billed after consumption and appear as Accrued Expenses on a company Balance Sheet.
A company may incur tax liabilities for earnings made during the period. These liabilities are accrued expenses until the company pays them.

Technical Stuff

Journal Entries for recording an Accrued Expense.

The typical Journal Entry for an Accrued Expense would DEBIT the EXPENSE Account (thereby reducing Net Income) for the Expense incurred.

And since we still need to Pay for the expense at a future date, a PAYABLE will be created on the Credit side of the entry (thereby creating a LIABILITY on the Balance Sheet).

The entry should look something like this -

Expense A/c Debit

(Various Titles) Expense Payable Credit

Examples of Journal Entries for Accrued Expenses

Interest Owed but not yet paid for borrowed funds

Interest Expense A/c Debit

Interest Payable Credit

Rent Accumulated, i.e., Rent owed but not yet paid

Rent Expense A/c Debit

Rent Payable Credit

It is essential to be aware of these constantly accumulating Expenses in a Businesses life since a failure to record Accrued Expenses will UNDERSTATE the LIABILITIES of a Business in the Balance Sheet and will also UNDERSTATE the actual expenses of a company in the Income Statement.

Disclaimer

The content provided on accountingsuperpowers.com and accompanying courses is intended for educational and informational purposes only to help business owners understand general accounting issues. The content is not intended as advice for a specific accounting situation or as a substitute for professional advice from a licensed CPA. Accounting practices, tax laws, and regulations vary from jurisdiction to jurisdiction, so speak with a local accounting professional regarding your business. Reliance on any information provided on this site or courses is solely at your own risk.

Tax and accounting rules and information change regularly. Therefore, the information available via this website and courses should not be considered current, complete or exhaustive, nor should you rely on such information for a particular course of conduct for an accounting or tax scenario. While the concepts discussed herein are intended to help business owners understand general accounting concepts, always speak with a CPA regarding your particular financial situation. The answer to certain tax and accounting issues is often highly dependent on the fact situation presented and your overall financial status.