Accrued expenses or accrued expenses are expenses that are calculated by the company when they are incurred, as opposed to when they are actually billed or paid. The accrual accounting method allows a company’s financial statements, such as balance sheets and income statements, to be more accurate.
Table Of Content
1 What is Accrued Expense?
2 How to Post Accrued Expense on the Balance Sheet?
3 What is the Difference Between Accrued Expenses and Accounts Payable?
4 Case Examples of Accrued Expenses in a Business
What is Accrued Expense?
Accrued expenses or accrued expenses are costs that need to be calculated by the company, but no invoices are received and no payments are made.
The following are some common examples of such expenses on companies:
- Loan interest
- Items that have been received
- Received service
- Salary for employees
- Tax
- Commission
- Utilities
- rent
How to Post Accrued Expenses on the Balance Sheet?
Accrued expenses are reported on the company’s balance sheet. The balance sheet shows what a company owns (“its assets”) and owes (“its liabilities”) as of a specific date, along with its shareholder equity.
Accrued expenses or accrued expenses will be recorded under the “Liabilities” section. It will look like this:
Paragraph “Liability” on the Balance Sheet:
Current Liabilities:
- Wages to be paid: 21,000,000
- Debt: 46,000,000
- Accrued expenses: 19,000,000
- Tax payable: 14,000,000
Total Current Liabilities: 100,000,000
In the example above, everything except accounts payable is accrued expense or company expenses to be paid in the future and often, accrued expenses must be estimated.
What is the Difference Between Accrued Expenses and Accounts Payable?
Accrued expenses are mandatory expenses that the company must incur and have to pay, but the company cannot do so because it has not been billed for them.
The company keeps these costs in mind so that management has a better indication of its true total liabilities. This will allow the company to make better decisions about how to spend its money.
On the other hand, accounts payable or trade payables are debts whose bills have been received but have not been paid. Both accrued expenses and accounts payable are recorded under “Current Liabilities” on the company’s balance sheet.
Once the accrued expenses are invoiced, the amount is transferred to accounts payable.
Examples of Accrued Expense Cases in a Business
The following is an example of when an expense should be accumulated or when this process is included in accounts payable.
Harum Jiwa bakery is a bakery company based in Jakarta, Indonesia. It uses organic ingredients in its bread, which are distributed and sold in 12 provinces in Indonesia.
In July, one of Fragrant Soul’s machines broke down. A local repairman came to assess the problem and asked the company to order special replacement parts from China. They did. The spare parts were stated to be delivered overnight, and the next day the repairman installed them. After the job is done, the machine works fine. The repairman handed over the bill on the spot, and departed.
In this situation:
1. The repairman has filed the bill. Thus, the amount does not need to be accumulated. The amount for repairmen’s services should be added to the amount of other unpaid invoices and entered in the total line item “Accounts Payable” on Harum Jiwa’s balance sheet.
2. The shipped part doesn’t yet have an invoice associated with it and it needs to be accumulated. The amount for that part should be added to all other accrual recording processes and reflected in the total “Accrued Expenses” line item on the balance sheet.
Accrued Expense Debit or Credit?
Debits and credits are used in the company’s books to keep the books in balance. A debit increases an asset or expense account and decreases a liability, income or equity account. Credit does the opposite.
When recording transactions, each debit entry must have a corresponding credit entry for the same dollar amount, or vice versa.
Let’s give an example, using the company Harum Jiwa Bakery again.
Harum Jiwa did the preparation of financial reports in August, and its employees have done unpaid work. The total unpaid wages amounted to 31,000,000. This will be considered an accrued expense. Thus, Harum Jiwa bookholders will:
1. Debit 31,000,000 to “Wages Expense” (reflected in the company’s income statement under “Operating Expenses”)
2. Credit $31,000,000 to “Wages Payable” (this will appear under “Short-Term Liabilities” on the balance sheet).
