Accrued Expenses are expenses that have been incurred by a company but have not yet been recognized because they have not been paid or recorded. At the statement date these expenses need to recorded through an adjusting entry to update the books of an entity.
Two examples illustrate why
expenses accrue. Firstly, companies accrue expense for services rendered. This
can be clearly seen in the periodic wage expense that they incur. A company has
an obligation to pay its employees only after they have performed their
service. Although this is true, at the statement date performance maybe only
partially completed but an expense and a corresponding obligation still need to
be recognized for the benefit received. A second example relates to periodic
interest payments. At the end of the accounting period, a company may not have
to pay interest but still needs to record the existence of an expense and an
obligation. Thus, at the statement date an adjusting entry is made to recognize
this accrual. A expense account is debited for the amount owed and parallel
credit is made to a liability account.
Example: Adequate Disclosure, Inc. pays its employees on a weekly basis. This week ends on a Wednesday. Wages of $5,000 for Thursday and Friday is to be accrued.
Common Sources of Accrued Expenses:
- Services Rendered
- Salaries and Wages
- Interest
- Taxes