An accrued expense, alternatively referred to as accrued liabilities, means the expenditure that is admitted in the accounts book before its actual payment. It is usually reflected in the exact accounting period, in which the expense is made.
Essence of the term
As accrued expenses are an enterprise’s liability to disburse prospective cash, they are recorded on the balance sheet acting as current debts. Notably, these expenditures may be ratable and distinguished from the supplier’s account that is obtained in due course. According to accrual accounting, expenses are regarded directly at the moment of occurence.
A case in study for accrued expenses can be the following situation. An enterprise acquires goods from a vendor. Anyway, the purchase invoice has not yet been issued. Or, other types of accrued expenses presuppose interest charges for loans, product warranties, as well as taxes. All of the mentioned forms haven't drawn the invoices. The same principle is applied to the salaries, commitment fees and employee bonuses, which are accrued during the emergence period, while the payment is effected in the next time interval.
Note: when a firm charges expenses, its fraction of outstanding bills also accumulates.
Types of Accrued Expenses
The two most common types of accrued expenses are the following:
- Accrued wages. This kind is quite frequent within enterprise and organizational transactions. It includes bonuses, commissions, or employee salaries that are accrued in the period of occurrence, but their actual payment is made later.
- Accrued interests. The type refers to the amount of interest that has been charged on a given date on a loan, or any other type of financial obligation, but hasn’t been paid yet.
The balance sheet summarizes the financial facilities of a firm for a definite period. In fact, it has two sides: the assets the enterprise owns, and the liabilities it possesses. Accrued expenses are subject to write-off in the liabilities side. These spendings increase the amount of obligations as a whole.
The accrual and cash methods are ways of accounting in tax and management recording.
Under the cash basis, income and expenses are recognized while there are associated cash flows. This method is convenient to use for small enterprises, and the results of their activities are highly dependent on incoming and outgoing monetary flows. Moreover, exchanging cash is anticipated.
The accrual method, in contrast, implies that the income and expenses of a firm aren’t related to the actual funds movement. In fact, they should be taken into account in the exact tax period when receiving. The practice makes it possible to obtain precise data on the enterprise’s standing at a particular moment with all its liabilities and assets.
Actually, there exist two classes of spendings. Accrued expenses are an opposing concept to the prepaid ones. The second is considered as upfront payments for goods and services that would be received in perspective. So that prepaid expenses are identified as assets, while accrued expenses form obligations in the balance sheet.
Accrued Expenses in real life
Typical examples of accrued expenses can be recurrent costs such as rent, electricity, and wages. A firm benefits from office area, heating and employee labor for up to a month before receiving an invoice or paying them.
Or, another case in study. Geo Space Contractors pays salaries to its employees on the fifth working day after the end of the month. The total payroll for June is $500,000.
Excluding taxes, the accrual entry for June 30 will be:
- Debit payroll and payroll expenses: $500,000.
- Credit salary and wages payable: $500,000
This accrual record confirms that the company has a debt obligation as of June 30, even though timesheets will not be processed and paid until the fifth business day of July.