Harness Money

What is an accrued expense?

An accrued expense refers to an expense that has been incurred but has not yet been paid or recorded in the financial statements. It represents an obligation or liability that a company owes for goods or services received but not yet paid for.

Accrued expenses are typically recorded when an expense is incurred in one accounting period, but the payment is expected to be made in a subsequent accounting period. These expenses are recognized through an adjusting journal entry at the end of the accounting period to ensure accurate financial reporting.

Examples of accrued expenses include:

1. Salaries and wages: If an employee has worked for a certain period but has not been paid by the end of the accounting period, the amount owed for their services is recorded as an accrued expense.

2. Utilities: If a company has received utility services (e.g., electricity, water, gas) but the utility bills have not yet been received or paid, the estimated amount owed is recorded as an accrued expense.

3. Interest expense: If a company has incurred interest on outstanding loans or debt, but the payment is due in the following period, the interest expense is accrued to reflect the liability.

4. Rent: If a company occupies leased premises but the rent payment for the period is due after the accounting period ends, the portion of rent owed is recorded as an accrued expense.

Accrued expenses are important for proper matching of expenses with the period in which they were incurred, ensuring that financial statements present a more accurate representation of a company’s financial position and performance. These accrued expenses are usually settled in cash in a subsequent accounting period when the actual payment is made, and the accrued liability is reduced accordingly.