Question

How would the following transaction be recorded as a journal entry? Would it even be recorded? Accurred expenses are recorded when they occur, but how does the fact that he hasn't written the reimbursement check affect the recording process?

"JS had been using a personal cell phone during January for business activities. JS’s accountant had indicated that this was an allowable expense for the business, so JS planned to write a reimbursement cheque (to himself) for $95 but hadn’t gotten around to it (this would probably happen in February sometime." The end of the fiscal year is Jan 31st so were only looking at one month of transactions

Thank you!

Answer 1

The highilighted part is important

- The matching principle, part of the accrual accounting method, requires that expenses be recognized when obligations are (1) incurred (usually when goods are transferred, such as when they are sold or services rendered) and (2) the revenues that were generated from those expenses (based on cause and effect) are recognized.

For example, a company makes toy Chairs and acquires wood to make its goods. It acquires the wood on January 1^st and pays for it on January 15th. The wood is used to make 100 toy chairs, all of which are sold on February 15. While the costs associated with the wood were incurred and paid for during January, the expense would not be recognized until February 15^th when the Chair that the wood was used for were sold.

If no cause-and-effect relationship exists (e.g., a sale is impossible), costs are recognized as expenses in the accounting period they expired (e.g., when they have been used up or consumed, spoiled, dated, related to the production of substandard goods, or the services are not in demand). Examples of costs that are expensed immediately or when used up include administrative costs, R&D, and prepaid service contracts over multiple accounting periods.

An accrued expense is an accounting term that refers to an expense that is recognized on the books before it has been paid; the expense is recorded in the accounting period in which it is incurred. Because accrued expenses represent a company's obligation to make future cash payments, they are shown on a company's balance sheet as current liabilities; accrued expenses are also known as accrued liabilities. An accrued expense is only an estimate, and will likely differ from the supplier’s invoice that will arrive at a later date.

Now The Reimbursement cheque is clearly the event that does not have certainity that it will get cleared.As it is based on estimate, However one can record expenses and later on change the Invoice booking or expenses.

It is advisable to recoed and make a samll provision based on the past experience.

Cell Phone Expenses

Like In above toy chair example this can be dealt

One can record the Phone bill in the month of Feb and make this expenses in the next year.

Secondly - One can book in jan Expenses and make necessary provision. and record revenue on estimate basis.

Conclusion - Accrued expense that is recognized on the books before it has been paid; the expense is recorded in the accounting period in which it is incurred. Because accrued expenses represent a company's obligation to make future cash payments, they are shown on a company's balance sheet as current liabilities; accrued expenses are also known as accrued liabilities. An accrued expense is only an estimate, and will likely differ from the supplier’s invoice that will arrive at a later date.