Accounting for Accrued Expenses

Accrued expenses represent costs that have been incurred but not yet paid or recorded at the end of an accounting period. They are a key component of the accrual basis of accounting, ensuring that expenses are matched to the periods in which they are incurred, regardless of when cash payment occurs. Accrued expenses commonly arise from salaries and wages, interest, utilities, taxes, and other routine obligations.

Recognition and Measurement

An accrued expense is recognized when:

• The expense has been incurred (the company has received goods or services).

• The amount can be reasonably estimated.

• Payment will occur in a future period.

Accrued expenses are recorded as current liabilities on the balance sheet until settled.

Common Examples of Accrued Expenses

• Accrued salaries and wages: Employees have provided services that will be paid for in the next period.

• Accrued interest: Interest on loans or bonds accumulates but is paid at a future date.

• Accrued utilities: Utility services have been used but not yet billed or paid.

Journal Entries for Accrued Expenses

At the end of the accounting period, a company records accrued expenses to match costs with the related revenue or period.

General Entry:

 Dr. Expense (e.g., Salaries Expense, Interest Expense)

  Cr. Accrued Liabilities (or specific liability account)

When the liability is paid:

 Dr. Accrued Liabilities

  Cr. Cash

Reversing Entries

To simplify accounting in the next period, companies may use reversing entries at the start of the following period. This approach prevents double-counting expenses when the actual invoice is recorded.

Reversing Entry Example (for accrued salaries):

 Dr. Accrued Salaries Payable

  Cr. Salaries Expense

Disclosure Requirements

Companies should disclose the nature and significant amounts of accrued liabilities in the notes to the financial statements, especially when material. This allows users to assess the timing and magnitude of future cash outflows.

Presentation on the Balance Sheet

Accrued expenses are classified as current liabilities, typically grouped with other payables such as accounts payable and wages payable.

Relevant Accounting Standards

• US GAAP: ASC 450 – Contingencies; ASC 405 – Liabilities

• IFRS: IAS 1 – Presentation of Financial Statements (current liabilities)

Both frameworks require accrued expenses to be recognized when incurred and presented as current liabilities.

Summary Table: Accrued Expenses Accounting

Aspect	Treatment
Recognition	When incurred, even if unpaid
Measurement	Reasonable estimate required
Balance sheet	Current liability until paid
Reversal	Optional, often used for convenience
Disclosure	Nature and amount in notes, if material

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