Accrued Expenses Example

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:

Accrued Expenses Journal Entry
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.

Accrued Expense – Accounting Equation
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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Accrued Expenses Example July 2nd, 2018Team

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