The company then receives its bill for the utility consumption on March 05 and makes the payment on March 25. The expense for the utility consumed remains unpaid on the balance day (February 28). The format of the journal entry is shown below:įor example, a company consumes $5,000 utility in February.
Salaries are not paid to employees until the end of the payment period.Īt the end of each recording period, a company should properly estimate the dollar amount for each of its accrued expenses, and then record it as an expense account with a corresponding payable account.The utility is consumed in one month, and the bill is received in the next month.Goods and services have been consumed, but bills have not yet been received.Some typical cases of accrued expenses include: The expenses are recorded in a company’s balance sheet as current liabilities most of the time, as the payments are generally due within one year from the transaction date. Understanding Accrued ExpensesĪccrued expenses or liabilities occur when expenses take place before the cash is paid. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) both require companies to implement the accrual method. Therefore, the accrual method of accounting is more commonly used, especially by public companies. It allows companies to record their credit and cash sales or payments in the same reporting period when the transactions occur. The accrual method requires appropriate anticipation for revenues and expenses.Īlthough it is easier to use the cash method of accounting, the accrual method can reveal a company’s financial health more accurately. Since the accrued expenses or revenues recorded in that period may differ from the actual cash amount paid or received in the later period, the records are merely an estimate. The accrual method of accounting required revenues and expenses to be recorded in the period that they are incurred, regardless of the time of payment or receiving cash.
In the cash method of accounting, revenues, and expenses are recorded in the reporting period that the cash payment is made. The major difference between the two methods is the timing of recording revenues and expenses. There are two types of accounting methods: the accrual method and the cash method.