Accrued Expenses Journal Entry is Debit the Expense Account and Credit the Expense Payable or Accrued Expense Account. Accrued expenses are expenses that have been incurred but not yet paid or recorded by the end of the accounting period. These expenses are recognized in the accounting period in which they are incurred, regardless of when the actual payment is made. Accrued expenses is a current liability which will show in balance sheet under an current liability. Common examples of accrued expenses include wages, interest, utilities, and taxes.
Example 1: Accrued Wages
Suppose your business employees who have earned wages of $5,000 by the end of the month (January 31, 2024), but the wages won’t be paid until February 5, 2024.
Journal Entry (January 31, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Wages Expense | 5,000 | |
| 01-31-2024 | To Wages Payable | 5,000 |
Explanation:
- Wages Expense will debited to recognize the expense incurred during January.
- Wages Payable will credited to show the liability to pay the wages in the next period.
Example 2: Accrued Interest
Your business a loan $1,200 of interest will accrued by December 31, 2024, but the payment will not be made until January 10, 2025.
Journal Entry (December 31, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Interest Expense | 1,200 | |
| 12-31-2024 | To Interest Payable | 1,200 |
Explanation:
- Interest Expense will debited to reflect the interest cost incurred during December.
- Interest Payable will credited to record the obligation to pay the interest in January.
Example 3: Accrued Utilities
Your business received a utility bill of $800 for services used in March, but the bill not be paid until April 10, 2024.
Journal Entry (March 31, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-31-2024 | Utilities Expense | 800 | |
| 03-31-2024 | To Utilities Payable | 800 |
Explanation:
- Utilities Expense will debited to account for the utility costs incurred during March.
- Utilities Payable will credited to represent the liability to pay the utility company in April.
Example 4: Accrued Taxes
Your business owes property taxes of $4,500 for the year ending December 31, 2024, but the taxes are not due until March 2025.
Journal Entry (December 31, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Property Tax Expense | 4,500 | |
| 12-31-2024 | To Property Tax Payable | 4,500 |
Explanation:
- Property Tax Expense will debited to recognize the tax expense for the year.
- Property Tax Payable will credited to show the liability to pay the taxes in the future.
Example 5: Accrued Salaries
Your business employees who earn $10,000 salaries by the end of the workweek on February 28, 2024, but the salaries won’t be paid until March 3, 2024.
Journal Entry (February 28, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 02-28-2024 | Salaries Expense | 10,000 | |
| 02-28-2024 | To Salaries Payable | 10,000 |
Explanation:
- Salaries Expense will debited to recognize the expense incurred by the employees’ work during February.
- Salaries Payable will credited to reflect the liability to pay the employees in March.
Example 6: Accrued Rent
Your business office rent $3,000 for the month of April 2024, but the payment not be made until April 30, 2024.
Journal Entry (April 30, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-30-2024 | Rent Expense | 3,000 | |
| 04-30-2024 | To Rent Payable | 3,000 |
Explanation:
- Rent Expense will debited to account for the cost of occupying the office space in April.
- Rent Payable will credited to record the obligation to pay the rent in May.
Example 7: Accrued Commissions
Your business paid $4,500 sales commissions to its sales staff for the month of June 2024, but the commissions will be paid on July 15, 2024.
Journal Entry (June 30, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 06-30-2024 | Commissions Expense | 4,500 | |
| 06-30-2024 | To Commissions Payable | 4,500 |
Explanation:
- Commissions Expense will debited to reflect the cost of commissions earned by the sales staff in June.
- Commissions Payable will credited to show the liability to pay the commissions in July.
Example 8: Accrued Interest on a Bond
Your business were issued a bond that accrues interest of $2,000 by December 31, 2024, but the interest will not be paid until January 15, 2025.
Journal Entry (December 31, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Interest Expense | 2,000 | |
| 12-31-2024 | To Interest Payable | 2,000 |
Explanation:
- Interest Expense will debited to recognize the cost of interest incurred by the bondholders for the year.
- Interest Payable will credited to record the liability to pay the interest in January.
Example 9: Accrued Warranty Expenses
Your business estimates that $1,200 worth of warranty claims will be made by customers for products sold in September 2024, but the claims have not yet been filed by the end of the month.
Journal Entry (September 30, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-30-2024 | Warranty Expense | 1,200 | |
| 09-30-2024 | To Warranty Liability | 1,200 |
Explanation:
- Warranty Expense will debited to account for the estimated cost of future warranty claims related to products sold in September.
- Warranty Liability will credited to recognize the obligation to cover these future claims.
Example 10: Accrued Income Taxes
Your business estimates that $7,500 in income taxes are owed for the quarter ending September 30, 2024, but the payment will not be made until October 15, 2024.
Journal Entry (September 30, 2024):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-30-2024 | Income Tax Expense | 7,500 | |
| 09-30-2024 | To Income Tax Payable | 7,500 |
Explanation:
- Income Tax Expense will debited to reflect the tax liability incurred during the quarter.
- Income Tax Payable will credited to record the obligation to pay the taxes in October.
Conclusion
Accrued expenses are essential for accurate financial reporting and also ensuring that expenses are recognized in the period when they are incurred, not when they are paid. By properly recording accrued expenses, businesses can better match their expenses with the revenue they generate, leading to a clearer picture of financial performance.