Question

Define an Accrued expense in your own words and give TWO examples OR journal entries of an Accrued expense.

Answer 1

• Accrued expenses are those expenses that are ‘accrued’ that is to say that they have been incurred BUT NOT PAID IN CASH.
• As per accrual system of accounting, an expense is to be recorded if it is incurred during the period whether the cash has been paid or not.

Based on this concept, all cost and expense for a period are to be recorded.

Accrued expenses are those expenses that are not yet paid by the end of period though they belong to that period.

Accrued expenses are generally recorded at the time of period end through an adjusting journal entry.

• Examples of Accrued expenses:

--Example 1: Monthly rent of office = $ 800. During the year 2018, the company paid $ 8,000 as rent. This means that 10 month’s rent has been paid while rent of 2 months are accrued. Hence $ 1,600 is accrued expense (Rent Expense)

--Example 2: Notes Payable is signed on 1 Oct 2018 of $ 20,000 at 10% for 12 months.

The above Notes Payable will be repaid fully along with interest in next accounting period. However, some part of interest belongs to the year 2018 which has to be recorded as an expense even though the same is not paid in cash in 2018. Period of note pertaining to 2018 is from 1 Oct to 31 Dec = 3 months. Interest expense for 3 months will be 20000 x 10% x 3/12 = $ 500. This $ 500 is an accrued expense.

• Journal Entries:

Accounts title	Debit	Credit
Rent Expenses	$                                     1,600.00
Rent payable		$                     1,600.00
(Accrued expense Rent)
Interest expense	$                                         500.00
Interest payable		$                        500.00
(Accrued expense: Interest expense)