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Accrued Expenses
Accrued expenses refer to expenses that the business has used but has not yet paid for.
- When expense is used but not paid
- Increase expense account by the amount used
- Increase liability by the amount used (Payable) Example: Salaries payable, Interest payable, Income tax payable
Watch Out!
Adjusting journal entries should only include expenses that were incurred in the current accounting period. Do no expense something that happened in a previous or in a future period.
For example: interest accrued in periods other than the current period should not appear in the adjusting journal entry.
Common Accrued Expenses
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Example: Accrued Expenses
Prepare the adjusting journal entries required using the following information. The company's fiscal year ends on December 31, 2020.
- Signed a $500,000, 5-year, note payable to purchase a building on March 1st, 2020. The note carries an interest rate of 7%.
- Employees earn $10,000 in wages every 2 weeks. On December 31st it had been 1 week since the last payday.
- ABC Inc. reported earnings before tax totalling $250,000 in 2020. The income tax rate is 30%.
Practice: Accrued Expenses
Prepare the following adjusting journal entries. The company's fiscal year ends December 31, 2020 and the income tax rate is 30%.
$6,000 of salaries have been earned by employees but not yet paid.
Transactions:
| Account | Debit | Credit |
|---|---|---|
Practice: Accrued Expenses
Read the following information and determine which adjusting journal entries are required at the end of the year, then prepare the adjusting journal entries. The company's fiscal year ends October 31, 2020.
On June 1st, 2015 the company signed a 20-year note payable for the purchase of a 500-acre tract of land costing $600,000. The note carries an annual interest rate of 8%, interest is paid on the 1st of January each year.
Transactions:
| Account | Debit | Credit |
|---|---|---|