Accrued Expense

Definition

An accrued expense is an accounting term used to describe an expense that has been incurred but has not yet been paid or recorded during an accounting period. These expenses are typically recorded in the company’s financial statements as liabilities.

Examples

Accrued Interest: Interest that has been incurred on a loan but has not yet been paid to the lender.
Accrued Rent: Rent owed but not yet paid by the tenant at the end of an accounting period.
Accrued Salaries: Wages owed to employees for work performed but not yet disbursed at the end of the accounting period.
Accrued Utilities: Expenses related to utilities that have been incurred but not yet settled.

Frequently Asked Questions

What is an accrued expense?

Answer: An accrued expense is a liability for goods or services that have been received or supplied but for which no invoice has been received or no payment has been made by the end of the accounting period. These are the costs that are recognized in the accounting period in which they occur rather than when they are settled.

How do accrued expenses impact financial statements?

Answer: Accrued expenses are recorded on the balance sheet as liabilities, and simultaneously, they impact the income statement by reducing net income. This method ensures an accurate reflection of a company’s financial condition.

Why is it important to record accrued expenses?

Answer: Recording accrued expenses is important for maintaining accurate financial records. It ensures that expenses are matched with the revenues they help generate in accordance with the matching principle of accounting, providing a more accurate picture of a company’s financial health.

How are accrued expenses accounted for?

Answer: Accrued expenses are typically documented by a journal entry that debits an appropriate expense account and credits a liability account. When the expense is paid in the following accounting period, the liability account is debited and the cash or bank account is credited.

What is the difference between accrued expenses and accounts payable?

Answer: While both represent liabilities, accrued expenses are costs that have been incurred but not yet billed by the supplier or paid by the company. Accounts payable, on the other hand, are billed amounts that the company has agreed to pay in the future because the goods or services have already been received.

Accrued Interest: Interest on a loan that has accumulated over a period but is not due to be paid until a later date.
Accrued Rent: Rent expense that has been incurred but not yet paid by the end of an accounting period.
Accrued Salaries: Wages that employees have earned but have not yet been paid by the end of the accounting period.
Deferred Expense: Expenses that have been paid but not yet incurred, which are recognized over time as the benefit accrues.

Online Resources

References

Bradbury, L. M. (2017). Principles of Accounting. XYZ Publishing.
Gibson, C. H. (2018). Financial Statement Analysis. South-Western College Publishing.
Horngren, C. T., & Harrison, W. T. (2015). Accounting. Pearson.

Suggested Books for Further Studies

Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2017). Introduction to Financial Accounting. Pearson.
Revsine, L., Collins, D. W., & Johnson, W. B. (2016). Financial Reporting and Analysis. McGraw Hill.
Stickney, C., & Weil, R. (2018). Financial Accounting: An Introduction to Concepts, Methods, and Uses. Cengage Learning.

Real Estate Basics: Accrued Expense Fundamentals Quiz

### What is an accrued expense? - [x] A cost incurred but not yet paid - [ ] A revenue earned but not yet received - [ ] A prepaid expense - [ ] A bank loan > **Explanation:** An accrued expense is a cost that has been incurred but not yet paid or recognized during the accounting period. ### Why are accrued expenses recorded? - [x] To match expenses with the revenues they help generate - [ ] To inflate profits - [ ] To simplify accounting records - [ ] To defer taxes > **Explanation:** Accrued expenses are recorded to adhere to the matching principle of accounting, ensuring that expenses are matched with the revenues they help generate. ### Which account is debited when recording an accrued expense? - [x] Expense account - [ ] Revenue account - [ ] Asset account - [ ] Revenue account > **Explanation:** When recording an accrued expense, the expense account is debited to reflect the cost incurred, while a liability account is credited. ### When an accrued expense is paid, which accounts are affected? - [ ] Debit expense, credit revenue - [ ] Debit revenue, credit expense - [x] Debit liability, credit cash/bank - [ ] Debit cash, credit liability > **Explanation:** When the accrued expense is paid, the liability account is debited, and the cash or bank account is credited. ### What distinguishes an accrued expense from accounts payable? - [ ] Both represent accrued liabilities. - [ ] Accrued expenses are future costs. - [x] Accrued expenses are incurred but not yet billed. - [ ] Accounts payable are unrecorded expenses. > **Explanation:** Accrued expenses are costs that have been incurred but not yet billed by the supplier, while accounts payable are for billed amounts that will be paid in the future. ### An example of an accrued expense would be: - [ ] Paid rent - [x] Salaries payable - [ ] Prepaid insurance - [ ] Bank interest received > **Explanation:** Salaries payable represent wages that employees have earned but not yet paid, making it an accrued expense. ### Where do accrued expenses appear on the balance sheet? - [x] Liabilities section - [ ] Assets section - [ ] Equity section - [ ] Revenue section > **Explanation:** Accrued expenses appear in the liabilities section of the balance sheet as current liabilities. ### Why is accurate recording of accrued expenses important? - [ ] To increase company profits - [x] To provide an accurate picture of financial health - [ ] To reduce accounting workload - [ ] To comply with vendor terms > **Explanation:** Properly recording accrued expenses ensures that a company's financial records accurately reflect its financial health by matching expenses to the periods they were incurred. ### What happens if accrued expenses are not recorded? - [ ] It shows higher assets - [ ] It reduces overall expenses - [x] It overstates net income - [ ] It reduces liabilities > **Explanation:** If accrued expenses are not recorded, expenses appear lower than they are, overstating the net income for the period. ### What principle requires the recording of accrued expenses? - [ ] Cash principle - [x] Matching principle - [ ] Revenue recognition principle - [ ] Cost principle > **Explanation:** The matching principle requires that expenses are recognized in the same period as the revenues they help generate, necessitating the recording of accrued expenses.