Accrued Expenses - TICK TOCK, it's a LIABILITY CLOCK
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!
Let me explain with a few examples.
Examples of Accrued Expenses
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 Expense A/c Debit
Interest Payable Credit
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.
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