Journal Entry for Reversing Accrued Expenses
Reversing accrued expense is the transaction that use to eliminate the accrued expense transaction based on the estimated amount. The company records accrued expenses at the end of the previous accounting period, and the accountant reverses the accrued at the beginning of the new period. The accountants reverse the accrued expense so that they can record the actual transaction.
An accrued expense is the expense that occurs but has not yet received an invoice from the supplier. In other words, it is an expense that has been incurred but not yet recorded or paid for. This can happen for a variety of reasons, but it typically occurs because the supplier takes some time to generate an invoice after the goods or services have been delivered.
For accounting purposes, accrued expenses are important because they represent a real expense and financial obligation that the company will need to pay in the future. As such, they should be included in the financial statements as part of the accrued liabilities. This will give investors and creditors a better understanding of the company’s financial obligations and help them make informed decisions about their investment.
Estimates of accrued expenses are essential in financial accounting in order to ensure that a company’s financial statements accurately reflect its true financial position.
There are a number of methods that can be used to estimate accrued expenses. One common method is to review the work perform and goods received in order to estimate the value to accrue. Another method is to review the company’s spending patterns and make an estimate based on historical data. Whichever method is used, it is important to estimate the amount of expense which close to the actual amount. There are a number of different methods that can be used to estimate accrued expenses, and it is important to select the most appropriate method for the particular circumstances. In addition, it is important to build in a margin of error to allow for any inaccuracies in the data. With careful planning and execution, accurate estimates of accrued expenses can be produced, which will lead to more accurate financial statements.
The accrued expense will record at the end of the financial report when the supplier has not yet billed the invoice. The company needs to reverse the accrued in the new period so that when the company receives the actual invoice, it can record the expense base on the actual amount.
Journal Entry for Reversing Accrued Expense
At the end of the month, company will record the accrued expense base on the estimated amount. The management estimated the accrued expense base on a variety of evidence such as past data, or actual events.
The journal entry is debiting expense and credit accrued liability.
| Account | Debit | Credit |
|---|---|---|
| Expense | 000 | |
| Accrued Payable | 000 |
The journal entry will increase the expense on income statement and the type of expense will depend on the nature of the transaction.
At the beginning of the new month, company will reverse the accrued transaction. It will remove the accrued payable and credit the expense account. The company expects to receive the bill for the exact expense amount.
The journal entry is debiting accrued payable and credit expenses.
| Account | Debit | Credit |
|---|---|---|
| Accrued Payable | 000 | |
| Expense | 000 |
The transaction will reverse the accrued payable from the balance sheet as it is not an exact payable amount. The expense will be in credit balance as the prior period amount has already moved to retained earnings. This credit expense balance is expected to net off with the exact amount when the company receives a bill from supplier.
When the company has enough information regarding the actual expense, supplier issue a bill for the expense. An accountant will require to record expenses and accounts payable/cash.
Journal entry is debiting expense and credit accounts payable/cash.
| Account | Debit | Credit |
|---|---|---|
| Expense | 000 | |
| Accrued Payable | 000 |
The transaction will record expenses, but it will net off with expenses that we record on the credit side. So there is no expense record in the new period if both balances is equal. The difference between both balances will impact the income statement. At the same time, it records the accounts payable for future settlements.
Example
Company ABC is preparing the annual financial statement for 202X. The accountant realized that the electric bill is not yet received for the December of 202X. The company has used the electricity for the month, but supplier has not yet issued the invoice, so the accountant cannot record the utility expense. So they have to estimate the electricity usage and record the expense on the income statement. Based on past experience, accountants have estimated the electricity is $ 1,000 per month, so they record the amount in the income statement.
On 05 Jan 202X+1, company receive the electric bill of $ 1,200 for December. Please prepare a journal entry of reversing accrued and the related transaction.
At the end of 202X, company needs to record the expense and accrued payable. Based on the estimation, company expects the utility expense is $ 1,000.
The journal entry is debiting utility expense $ 1,000 and credit accrued payable $ 1,000.
| Account | Debit | Credit |
|---|---|---|
| Utility Expense | 1,000 | |
| Accrued Payable | 1,000 |
The transaction will increase the utility expense $ 1,000 on the income statement. It also records the accrued payable $ 1,000 for the amount owed to supplier.
On 01 Jan 202X+1, company has to reverse the accrued expense by making a journal entry in the opposite way. The journal entry is debiting accrued payable $ 1,000 and credit utilities expense $ 1,000.
| Account | Debit | Credit |
|---|---|---|
| Accrued Payable | 1,000 | |
| Utility Expense | 1,000 |
When the company receives the invoice of $ 1,200, accountant just records utility expense and accounts payable as normal. The journal entry is debiting utility expense $ 1,200 and accounts payable $ 1,200.
| Account | Debit | Credit |
|---|---|---|
| Utility Expense | 1,200 | |
| Accounts Payable | 1,200 |
If we combine the three transactions above, the utilities expense $ 1,000 is recorded in the year 202X. Additional utilities expense $ 200 is recorded in Jan 202X+1.
The variance incurs due to the underestimate, and it needs to record in a new period as the accounting for the estimate is not retrospective. The variance will impact the new period.