Accrued Expense (Accounting) - Explained
What is an Accrued Expense?
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Table of ContentsWhat is an Accrued Expense? How to Record Accrued Expenses?Example of an Accrued Expense
What is an Accrued Expense?
Accrued expenses are things that we have been using, but we have not paid for them yet.
How to Record Accrued Expenses?
With an Accrued Expense, cash has not been affected yet - as the debt will be paid or recorded at a later date. So, you are incurring an expense throughout the year and you are recording it at the end of your accounting period (generally December 31st). At that point, you will record it as an expense that can be maintained as a liability or paid. So accrued expenses are the costs that are incurred in a period that are both unpaid and have not been recorded. We're waiting until December 31st to do this.
Example of an Accrued Expense
Bravo Company accrued six thousand dollars of salary/bonus expense that will be paid at the beginning of the year. Now, these funds are earned by the employee and owed by Bravo company in Year 1, but are going to be paid in Year 2. So, we have to record this at that end of Year 1.
We've used our employee services. We're just not paying them yet. We've got to put them into an expense account, but we're going to hold back off on the cash right now. So let's look at how we would how we would do this.
On Dec. 31st, I'm going to put as a debit (because we're dealing with expenses here) on salaries expense. I have to have something on the other side of the accounting equation to make it balance. I've got to figure out a way to say I still owe them that money. So, we are going to credit an account called - salaries payable.
When we actually do pay it, we'll take it out of salaries payable by debiting accounts payable. On the other side, we are also going to take it out of cash by crediting cash (so cash goes down).