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Accrued expenses

Also referred to as outstanding expenses, Payable expenses and Unpaid Expenses

These expenses have been incurred by a business but the business has not yet paid them

For example a firm used a building for a month but the building rent amounting to $5000 is still unpaid at the end of financial or accounting period. Since the firm has used up this expense (i.e. rent expense), it is required to record $5000 as expenses in full and $5000 is known as accrued expense

Nature of Accrued Expenses

Accrued expenses are the liabilities of a business because the entity has to pay these expenses and these expenses will decrease the future economic benefits of the business

Double entry for accrued expenses

DEBIT = Expenses Account

CREDIT = Accrued expenses Account

This is a an adjusting entry, it will adjust the amount of expenses that should be recorded in the books of accounts for the current accounting period

Example:

XYZ enterprise manufactures micro chips for tablets and desktop computers. On 1st January, 2012 they got the new connection of telephone. The telephone bills are payable at the end of every 3 months

Following is the detail of telephone bill payments by XYZ enterprise


Amount of Expenses
Expense due on
Expenses paid on

   $500
   $500
   $500
   $500

   31 March 2012
   30 June 2012
   30 September 2012
   31 December

   31 March 2012
   3 July 2012
   8 October 2012
   6 January 2012

Requirement: You are required to calculate the amount expenses pertaining to this accounting period or The amount of expenses that should be charged for the year ended on 31 December, 2012

Solution:

These double or journal entries were made by business at the time of expenses payments

On March 31, 2012 the company paid cash for the use telephone services

  DESCRIPTION DEBIT CREDIT



   Telephone expenses   $500



               Cash   $500




On July 3 The company again paid $500 to the telephone company

  DESCRIPTION DEBIT CREDIT



   Telephone expenses   $500



               Cash   $500




On 8 October 2012 The company paid $500 for the use of telephone service 

  DESCRIPTION DEBIT CREDIT



   Telephone expenses   $500



               Cash   $500




On 6 January 2012 Company paid $500 after the end of accounting period. Since the company has used up these expenses in this accounting period, these expenses are related to this period and should be recorded in this period. Therefore, company made an adjusting entry for these accrued expenses on 31 December, 2012

The following adjusting entry was made on 31 December, 2012 to allocate expenses to this accounting period

  DESCRIPTION DEBIT CREDIT



   Telephone expenses   $500



               Accrued Telephone expenses   $500




Now you just have to post the above journal entries in Telephone account to find out the "Total telephone expenses" for this accounting period




DEBIT
Telephone expenses A/C*



CREDIT
DATE
DESCRIPTION
AMOUNT
DATE
DESCRIPTION
AMOUNT
Mar. 31
Jul. 3
Oct. 8
Dec. 31
Cash
Cash
Cash
Accrued telephone ex.
$500
$500
$500
$500
Dec. 31 Income statement (BF*)
$2000

TOTAL $2000
TOTAL $2000

$2000 is "Total amount of expenses" that should be charged to this accounting. These expenses will be shown in income statement

*A/C=Account
*BF=Balancing figure