How to Accrue Expenses
Accrued expenses or liabilities are expenses that have been incurred by a company over time, but have yet to be paid. They are charges that a business must pay later for goods and services that have been rendered. Proper tracking of accrued liabilities is imperative to ensure a business’s balance sheet is unerring. You have to fully understand the basic accounting principles before discovering how to properly record accrued liabilities. Here is a step-by-step guide to recording accrued expenses.
Step 1: Understand Accrued Expenses
Accrued expenses occur when there are still unrecorded liabilities and unpaid expenses at the end of an accounting term. For instance, earned wages that are yet to be disbursed should be recorded as accrued expenses. Businesses take care of accrued liabilities by conducting adjusting entries to the book of original entry or general journal.
click here – What Are Security Tips For Company Servers
Step 2: Understand Why You Have to Accrue an Expense
Accrual-based accounting recognizes that a business must record expenses and revenues in the accounting period they were incurred, and not when money is paid or received. The concept related to expenses is referred to as the matching principle.
- The matching principle proposes that accountants document expenses in the period that they were incurred. It also states that these expenses balance out their correspondent revenues.
- What this principle means for your business is that you don’t have to wait until money changes hands before recording an expense.
Step 3: Find Out the Expenses That Require Accrual
Following the principles above, incurred expenses that haven’t been paid yet must be accrued on the balance sheet. Here are some of the common ones.
- Accrued interest
- Accrued wages
- Accrued taxes
Step 4: Estimate the Prorated Accrual
After discovering the accrued expenses, you have to calculate the sum of accrued expenses by prorating the part of the overall expense that falls on the present accounting period. After you have determined the overall dollar sum of the accrual and the accrual accounts, recording them into the general journal begins.
Step 5: Make the Correct Adjusting Entry
To accrue expenses, you have to record an adjusting entry into the general journal. Adjusting entries take place at the end of an accounting term.
- Adjusting entries should be done like this: debit the correct expense account, then credit the correct payable account. Note that debits grow expense accounts, while credits grow liability accounts.
- To overstate income and understate liabilities, you just have to not make any adjusting entries in the correct accounting period.
Step 6: Reverse the Accrual Entry In the Next Accounting Period
The invoice of the accrual will arrive and it will be worked on in the normal course of business. Therefore, to prevent counting the expense twice, you have to reverse the first accrual entry in the accounting period that follows. Many accounting software allow the accountant to identify the date for reversal for any adjusting entry. This can also be done manually.
Recording an accrual can be difficult at times, and not doing it properly could result in several inaccuracies in a company’s balance sheet. However, by fully understanding what an accrued expense is and which of your expenses require accrual, this whole process has been made a whole lot easier.