Accrued Expense Journal Entry
Overview
Accrued expense is the expense that has already incurred during the period but has not been paid for yet. The accrued expenses may include interest expense, salaries and wages, and utility expenses, etc. Likewise, at the period end adjusting entry, the company needs to account for all the accrued expenses with appropriate journal entries.
Accrued expense journal entry is made to record the expense that has already incurred as well as to recognize the obligation liability that the company has. Hence, without a proper record of the accrued expense at the period end adjusting entry, both total liabilities in the balance sheet and total expenses in the income statement will be understated.
Accrued expense journal entry
The company can make the accrued expense journal entry by debiting the expense account and crediting the payables account.
| Account | Debit | Credit |
|---|---|---|
| Expense | 000 | |
| Payables | 000 |
The company makes this journal entry to recognize the incurred expense as well as the obligation existed at the end of the period. Likewise, this journal entry increases both the expense (debit) in the income statement and the liability (credit) in the balance sheet.
After the company makes the payment, it can make the journal entry to eliminate liability by debiting the payables account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Payables | 000 | |
| Cash | 000 |
This journal entry does not affect the income statement as the company has already recognized the expense at the last period-end adjusting entry.
Example
For example, the company ABC Ltd. has the policy to pay the wages to its employees every two weeks. On July 24, 2020, the company made the $5,000 wages payment for the two weeks (or ten days) of work the employees have performed.
The next wage payment will not occur until August 07, 2020. Hence, at the end of July, the company needs to recognize the expense of $2,500 (5,000 / 10 x 5) that the employees have worked for five days (from Monday 27th to Friday 31st).
1. What is the journal entry of accrued expense for wages in the July 31 adjusting entry?
2. What is the journal entry for the $5,000 wages payment on August 07, 2020?
Solution:
1. July 31 adjusting entry
In the July 31 adjusting entry, the company ABC Ltd. can make the accrued expense of journal entry for the five days of wages as below:
| Account | Debit | Credit |
|---|---|---|
| Wages expense | 2,500 | |
| Wages payable | 2,500 |
In this journal entry, the company recognizes (debit) $2,500 as accrued expense since the employees have already worked for five days but have not been paid for yet. On the other hand, the $2,500 of wages payable (credit) is the liability that the company owes to its employees for the five days of works.
If this journal entry is not recorded, both total expenses in the income statement and total liabilities in the balance sheet will be understated by 2,500.
2. Wages payment on August 07, 2020
When ABC Ltd. makes the $5,000 payment of the wages on August 07, 2020, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Wages payable | 2,500 | |
| Wages expense | 2,500 | |
| Cash | 5,000 |
The debit of 2,500 in wages payable account here is to eliminate the wages liability that the company has recorded in the July 31 adjusting entry. On the other hand, the 2,500 of debit in wages expense is to recognize the expense that has already incurred for five days (from Monday 3rd to Friday 7th) in the current period of August.
