Accrued Expense


Accrued expense is expense which has been incurred but not yet paid.

Expense must be recorded in the accounting period in which it is incurred. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid.

As expense will be debited to record the accrued expense, a corresponding payable must be created to account for the credit side of the transaction. The accounting entry to record accrued expense will therefore be as follows:

DebitExpense (Income Statement)
CreditExpense Payable (Balance Sheet)

Example

ABC LTD pays loan interest for the month of December 2010 of $10,000 on 3rd January 2011. ABC LTD has an accounting year end of 31st December 2010.

ABC LTD will recognize interest expense of $10,000 in the financial statements of year 2010 even though it was paid in the next accounting period as it relates to the current period. Following accounting entry will need to be recorded to account for the interest expense accrued:


DebitInterest Expense$10,000
CreditInterest Payable$10,000

On the date of payment of interest (i.e. 3rd January of the next year) following accounting entry will need to be recorded in the subsequent year:

DebitInterest Payable$10,000
CreditBank$10,000

Test Your Understanding

ABC LTD has a year end of 31st December 2011. Which of the following transactions and events should give rise to accrued expense in ABC LTD's financial statement?

ABC LTD receives rent income in advance. Rent for the first quarter of 2012 is due on 31st December 2011.

ABC LTD pays salary to its employees on 25th of every month.

XYZ LTD provides janitorial services to ABC LTD. The related expense for the month of December 2011 had not been recorded in the financial statements as the related invoice was received in February 2012.