Accrued expenses sometimes referred to as accruals, are expenses which has been incurred but at the end of the accounting period not yet recorded in the accounting ledgers by the normal transaction process.
A business has an annual premises rent of 12,000 but an invoice has not been received from the landlord and the rental expense has not been recorded in the accounting records.
Accrued Expenses Journal Entry
At the end of the first month the business needs to accrue the cost of the rent for the period. The accrued expense is calculated as follows.
Rental account period = 12 months Annual rent = 12,000 Period of accounts = 1 month Accrued expense = 12,000 x 1 / 12 = 1,000
The accrued expenses journal entry is as follows:
| Account | Debit | Credit |
|---|---|---|
| Rent expense | 1,000 | |
| Accrued expense | 1,000 | |
| Total | 1,000 | 1,000 |
The accrual journal shown above debits the rent expense account which represents the cost to the business of using the premises for the month. The credit entry to the accrued expenses reflects the liability of the business to pay the supplier (landlord) for the amount of service consumed during the period.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
| Assets | = | Liabilities | + | Owners Equity |
|---|---|---|---|---|
| None | = | Accrued expenses | + | Rent expense |
| 0 | = | 1,000 | + | -1,000 |
In this case the balance sheet liabilities (accrued expenses) has been increased by 1,000, and the income statement has a rent expense of 1,000. The expense reduces the net income, retained earnings, and therefore owners equity in the business.
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Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.