Cartoon image of a person placing a reminder note on a refrigerator to pay the electricity bill which has not yet been received

So, you’ve heard whispers about “accrued expenses” and thought to yourself, “Is that some kind of secret club?” Well, grab a seat and maybe a coffee (or something stronger), because we’re about to demystify this accounting wizardry. And trust me, it’s more exciting than watching paint dry on financial statements!

Think of an accrued expenses journal entry as that sticky note you leave on the fridge: “Note to self—pay the electricity bill we haven’t received yet.” It’s your company’s way of saying, “We owe some folks money, even if they haven’t sent us the bill.” This little trick keeps your books honest and your accountants smiling.

But here’s the kicker: you only make these entries when you’re using accrual accounting. Why? Because accrual accounting is like being the responsible adult who plans ahead, while cash-basis accounting is more like that friend who only deals with problems when they’re banging on the door.

In accrual accounting, you record expenses when they happen—not just when cash changes hands. It’s about matching expenses to the time they’re incurred, not when you feel like dealing with them. So, let’s dive into how to make these journal entries without feeling like you’re drowning in numbers.

Accrued expenses journal entry—because ignoring bills doesn’t make them go away!

Related: Is prepaid rent debit or credit? Examples in journal entry

Understanding Accrued Expenses: It’s Not Rocket Science

Alright, let’s break it down. Accrued expenses (also known as accrued liabilities) are expenses you’ve racked up but haven’t paid for yet. Imagine ordering a pizza today and promising to pay for it next week. You enjoyed the cheesy goodness now, but your wallet feels the hit later.

Illustration of a person surfing a wave filled with numbers under a bright sun

Common examples of accrued expenses include:

  • Office Supplies: You snagged those fancy notebooks and pens, but the supplier hasn’t sent an invoice yet. Stationery hoarding, anyone?
  • Interest Payments: That business loan isn’t going to pay itself, and interest is ticking even if the bill hasn’t arrived.
  • Taxes: Ah, taxes—the ever-present shadow. You’ve incurred them, but the payment isn’t due just yet.
  • Employee Wages: Your team crushed it this month, but payday isn’t until next month. They might be dreaming of their paycheck, but you need to account for it now.

Here’s the deal: You record these expenses in the period they occur to keep your financial statements accurate. It’s like acknowledging, “Yes, we owe money, and we’re adult enough to admit it.” This not only keeps your books in line with the balance sheet but also ensures you’re not blindsided when the actual bills roll in.

Accrued expenses show up as liabilities on your balance sheet—not as expenses on your income statement. Why? Because they’re obligations—the financial equivalent of promises you can’t back out of. And sometimes, you might have to estimate these amounts. It’s like guessing how much your utility bill will be because someone thought leaving all the lights on overnight was a brilliant idea. (Thanks, Carl.)

See also: Notes receivable debit or credit?

Debit and Credit Rules: The Accounting Tango

Now, before your eyes glaze over, let’s make this fun. Think of debits and credits as the yin and yang of accounting—they balance each other out. For every action, there’s an equal and opposite reaction. Yeah, Newton’s Third Law applies here too!

Here are the golden rules:

  • Assets, expenses, and dividends: Increase with a debit, decrease with a credit.
  • Equity, liabilities, and revenue: Increase with a credit, decrease with a debit.

In plain English, when you incur an expense (like those unpaid wages), you debit the expense account (it’s increasing) and credit the accrued expenses account (your liabilities are increasing). This keeps everything in balance, just like your favorite yoga pose.

According to these rules, liabilities like accrued expenses are recorded as credits. So, when you eventually pay off the expense, you reverse the original entry. It’s like saying, “Debt paid! We can all sleep easier now.”

Check out: Is Investment Debit or Credit?

Accrued Expenses Journal Entry Explained: Let’s Get Practical

Illustration of a person surfing a wave filled with numbers under a bright sun

Time to roll up those sleeves and get into the nitty-gritty. Making an accrued expenses journal entry involves two steps:

  1. Recording the Expense Incurred: You debit the expense account (increasing your expenses) and credit the accrued expenses account (increasing your liabilities).
  2. Recording the Payment of the Expense: When you pay off the expense, you debit the accrued expenses account (decreasing your liabilities) and credit your cash or bank account (decreasing your assets).

When You Incur the Expense

Imagine it’s December 31, and you’ve got expenses that haven’t been billed yet. Here’s how you’d record it:

Sample Entry of Accrued Expenses When an Expense Is Incurred

DateAccountDebitCredit
12/31/2022Expense$1,000
Accrued Expenses$1,000

You’ve increased your expenses and acknowledged the liability. High-five!

When You Pay the Expense

Fast forward to January when you’re settling that debt. Here’s the entry:

Sample Entry of Accrued Expenses When the Expense Is Paid

DateAccountDebitCredit
01/31/2023Accrued Expenses$1,000
Cash/Bank$1,000

Liability decreased, cash decreased, books balanced. Accountant does a happy dance.

If you skip this adjusting entry, your financial statements might look like you have more money than you actually do. And let’s be honest, nobody likes financial surprises (unless you find a $20 bill in your old jeans).

See also: Utilities payable debit or credit?

Accrued Expenses Journal Entry Examples: Show Me the Numbers!

Enough theory—let’s look at some real-world examples to solidify your accounting prowess.

Accrued Interest

Suppose ABC Company has a loan of $1,000,000 with an interest rate of 1% per month. They pay interest on the 5th of every month. On December 31, they owe interest for December but won’t pay it until January 5.

The Entry to Record Accrued Interest:

DateAccountDebitCredit
12/31/2022Interest Expense$10,000
Accrued Expenses (Accrued Interest)$10,000

You’ve recognized the expense and the liability.

The Entry When the Interest Is Paid:

DateAccountDebitCredit
01/05/2023Accrued Expenses (Accrued Interest)$10,000
Cash/Bank$10,000

Debt settled! You can almost hear the sigh of relief.

Accrued Wages

Your employees have worked hard in January, earning $5,000, but payday isn’t until February. Here’s how you record it:

Accrued Expense Entry for Wages:

DateAccountDebitCredit
01/31/2023Wages and Salaries Expense$5,000
Accrued Expenses$5,000

When You Pay the Wages:

DateAccountDebitCredit
02/02/2023Accrued Expenses$5,000
Cash$5,000

Your team is happy, and your books are accurate. Win-win!

Accrued Payroll Tax

Let’s say you owe $1,000 in payroll taxes for December but will pay them in January.

Accrued Tax Expense Entry:

DateAccountDebitCredit
12/31/2022Tax Expense$1,000
Accrued Expenses$1,000

When You Pay the Taxes:

DateAccountDebitCredit
01/02/2023Accrued Expenses$1,000
Cash$1,000

Another obligation met. Feels good, doesn’t it?

Accrued Goods and Services

You ordered furniture on July 1, received it on July 28, but you have not received the invoice yet and won’t pay the $7,000 until August 30.

Recording the Goods received but not invoiced and paid yet:

DateAccountDebitCredit
07/31/2023Furniture$7,000
Accrued Expenses$7,000

When You Get The Invoice:

DateAccountDebitCredit
08/30/2023Accrued Expenses$7,000
Accounts Payable$7,000

When You Pay for the Furniture:

DateAccountDebitCredit
08/30/2023Accounts Payable$7,000
Cash$7,000

Your office looks great, and your accounting is on point. Kudos!

Accrued Utilities

You estimate your June utilities to be $3,000, but the bill hasn’t arrived yet.

Recording Accrued Utilities:

DateAccountDebitCredit
06/30/2023Utility Expense$3,000
Accrued Expenses$3,000

Adjusting Entry When You Pay the Utility Bill:

DateAccountDebitCredit
07/01/2023Accrued Expenses$3,000
Cash$3,000

Takeaways

Keeping the lights on and the books balanced—that’s how you do it!

There you have it—a comprehensive guide to accrued expenses journal entries without the snooze fest. By keeping track of these expenses, you’re not just complying with accounting principles; you’re making sure your financial picture is as accurate as possible. And who doesn’t like accuracy?

Remember, accounting doesn’t have to be dull. With a little humor and a solid understanding, you can tackle those numbers like a pro. Now go forth and balance those books!

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