Accrued Expense
Candlefocus EditorAccrued expenses typically refer to expenses incurred during a period when cash has not yet exchanged hands; however, they can also refer to expenses that have been billed but not yet paid. A company can record an accrued expense either with a journal entry or with an accrual entry. A journal entry requires the business to debit an expense account and credit an accrued expenses liability account. An accrual entry is similar, but involves the creation of an accrual in the accounts payable system of the business. The creation of the accrual allows companies to match expenses with revenues to present a more accurate picture of their financial position.
In addition to expenses that have been incurred but not paid, accrued expenses can also refer to prepayments. In the case of prepayments, a company has paid for an expense prior to it being incurred and recognized on the books. This type of situation is more common with regular expenses that occur each month, such as rent or utilities. Prepaid items are recorded in an asset account, as the company has made a payment in advance.
Accrued expense accounting is an important concept for businesses to understand and use to ensure that they have an accurate picture of their finances. By properly recognizing expenses in the period they occur, businesses can more accurately measure their profitability and cash flow. This practice helps to ensure that all expenses are properly accounted for and no expenses are overlooked.