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Accrued Expenses

Accrued expenses are those already incurred and are or are not recorded, and due for payment within an accounting period but have not been paid either partly or wholly during the period or they are deferred. They are usually paid after the end of the period. These expenses must be accounted for in the period in which they are incurred, not when they are paid which is in compliance with the accrual system of accounting.

All expenses whether they are paid or remain unpaid must be included in the accounting period in which they occurred so that an accurate net profit can be established. When expenses are paid, they are recorded in the books and accounts. Those expense items which are not paid at the close of the period are likely to be overlooked and no adjusting entries for accrued expenses are made for them. These affect the profit and loss account and inflate the net profit and understate liabilities.

Accrued expenses include utilities, wages, interest, bonuses and taxes. They are charged to the income statement to match the revenues earned in the same period. They are shown as current liabilities on the balance sheet. Journal entries are required to record such unpaid expenses as accrued expenses at the end of the accounting period.

For example, insurance premiums of $800 for the year are paid quarterly. Payments due are usually paid a few days later. Assume that the accounting period ends on 31stDecember. The following table shows the details.

Quarterly amount Date payable Date paid
$

200 31 March 20X1 5 April 20X1
200 30 June 20X1 7 July 20X1
200 30 September 20X1 3 October 20X1
200 31 December 20X1 6 January 20X2


Journal entry for the year-end adjustment:

Date Particulars Debit Credit


$ $
20X1


Dec 31 Insurance 200

Insurance Payable
200

(Insurance accrued but not yet paid)







200 200





The insurance accounts that appear in the general ledger:

Insurance Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X1


Apr 05 Cash
200
Dec 31 Profit and Loss
800
July 07 Cash
200




Oct 03 Cash
200




Dec 31 Insurance Payable
200
















800



800










Insurance Payable Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X1


Dec 31 Balance c/d
200
Dec 31 Accrued
200


Alternatively, one insurance account may be enough instead of the above two accounts, as follow:

Insurance Account

Date Particulars Folio Amount Date Particulars Folio Amount



$


$
20X1


20X1


Apr 05 Cash
200 Dec 31 Profit and Loss
800
July 07 Cash
200



Oct 03 Cash
200



Dec 31 Balance c/d
200














800


800












20X2






Jan 01 Balance b/d
200

The above ‘Balance c/d’ is clearly a quarterly premium owing and is brought forward to the next accounting period as a credit balance (liability) until it is paid off on 6 January 20X2.

As can be seen from the above, actual cash paid for insurance in the year 20X1 was $600 but the total insurance expense (see Insurance Account) transferred to profit and loss account in the same year was $800. This means we had credited the cash account with $600 and debited the expense account of insurance with $800. The two amounts differ and this is against the double-entry system as both the debit and credit sides must be posted with equal amounts in order that they balance. The closing debit balance of cash was more by $200 at the year end for not paying the last premium. However, this is balanced off by providing an accrual of $200 as credit balance for the insurance account.


Alternative presentation:

Insurance

Date Accounts Ref. Debit Credit Balance



$ $ $
20X1




Apr 05 Cash
200
200
July 07 Cash
200
400
Oct 03 Cash
200
600
Dec 31 Insurance Payable
200
800


Insurance Payable

Date Accounts Ref. Debit Credit Balance



$ $ $
20X1




Dec 31 Insurance - accrued

200 200






Last Updated (Thursday, 07 October 2010 15:53)