Businesses operate through transactions classified as payments and receivables. Over time, these transactions accumulate. A business tracks the accumulated transactions and business records and documents them for reference. In accounting, these expenses can be called accrued expenses or payables, depending on the transaction model and type. Let’s look at some quick facts about accrued expenses.
What Are Accrued Expenses?
Accrued expenses are a business’s liabilities incurred but don’t have any invoice or expenditure documentation yet, build up over time, and are due for payment. Since they’re categorized as current liabilities, accrued expenses are due for payment within a current 12-month period from the date of transaction.
It’s important to document and track these expenses because they’re charges you’re obligated to pay for goods and/or services already rendered. This ensures the company’s balance sheet is accurate.
Example of Accrued Expenses
Accrued expenses may vary or differ based on industry and company. Some of the common examples of company accrued expenses are:
- Interest (accrued interest)
- Utilities to be paid
Accruals are reported when an expense is incurred, and not when paid. For example, when you’ve used water or electricity but the utility hasn’t billed you yet, until the next month or quarter, that will be recorded as an accrued expense.
Accrued Expenses in a Business Vs. Accounts Payable
Accrued expenses (liabilities) occur when a business incurs expenses. They’re often short-term expenses such as utilities and must be paid within 12 months (one year) from the transaction date. This is why they’re recorded under current liabilities on the balance sheet.
Accounts payable are payments owed to creditors, and other long-term expenses, including suppliers for goods/items supplied and services incurred on credit. They’re current liabilities or short-term debts that must be paid in the near future.
Accounts payables must be within a specific period, and the company must receive and record the suppliers’ invoices. Payments are made as specified in the invoice to avoid defaulting and help maintain the company’s financial health.
How Are Accrued Expenses and Accounts Payables Recorded?
In bookkeeping and accounting, accrued expenses (or accrued liabilities) are placed on the company’s balance sheet under current liabilities at the end of the accounting period. This happens by formally adjusting the ledger’s journal entries to balance the books.
Accounts payables are business expenses recorded on the balance sheet when a company buys goods or services on credit and receives an invoice. The invoice is the expense documentation and proof of transaction.
Accrued Expenses in a Business vs. Prepaid Expenses
Accountants usually refer to accrued expenses as the exact opposite of a business’ prepaid expenses. In general, Prepaid expenses are business payments made prior (in advance) to receiving goods or services to be used. While prepaid expenses are recorded as assets on businesses’ balance sheets, accrued expenses usually represent liabilities (often current liabilities).
What Is the Journal Entry for Accrued Expenses?
Assuming you owe a debt but haven’t been billed, you’ll make an accrued liability (expenses) entry in your accounting books to show that you owe this debt. The accrued expense journal entry is entered as a debit to an expense account in the book. This debit entry balances your books by increasing your expenses.
Businesses operate with different expenses and liabilities. When a business incurs expenses without receiving expenditure documentation, that expense becomes accrued and a liability to the business. If the business orders a service or product and receives an invoice, that expense becomes payable. This difference should be reflected in the accounting books within the accounting period.