Adjusting Entry for Accrued Expenses

Accrued expenses refer to expenses that are already incurred but have not yet been paid.

At the end of period, accountants should make sure that they are properly recorded in the books of the company as an expense, with a corresponding
payable account.

Here's the rule. If a company incurred, used, or consumed all or part of an expense, that expense or part of it should be properly recognized even if it
has not yet been paid.

If such has not been recognized, then an adjusting entry is necessary.

Pro-Forma Entry

The pro-forma adjusting entry to record an accrued expense is:

mmm dd Expense account* x,xxx.xx

Liability account** x,xxx.xx

*Appropriate expense account (such as Utilities Expense, Rent Expense, Interest Expense, etc.)

**Appropriate liability account (Utilities Payable, Rent Payable, Interest Payable, Accounts Payable, etc.)

For Example

For the month of December 2017, Gray Electronic Repair Services used a total of $1,800 worth of electricity and water. The company received the bills
on January 10, 2018. When should the expense be recorded, December 2017 or January 2018?

Answer – in December 2017. According to the accrual concept of accounting, expenses are recognized when incurred regardless of when paid. The
amount above pertains to utilities used in December. Therefore, if no entry was made for it in December then an adjusting entry is necessary.

Dec 31 Utilities Expense 1,800.00

Utilities Payable 1,800.00

In the adjusting entry above, Utilities Expense is debited to recognize the expense and Utilities Payable to record a liability since the amount is yet to be
paid.

Here are some more examples.

More Examples: Adjusting Entries for Accrued Expense

Example 1: VIRON Company entered into a rental agreement to use the premises of DON's building. The agreement states that VIRON will pay monthly
rentals of $1,500. The lease started on December 1, 2017. On December 31 of the same year, the rent for the month has not yet been paid and no
record for rent expense was made.

In this case, VIRON Company already incurred (consumed/used) the expense. Even if it has not yet been paid, it should be recorded as an expense.
The necessary adjusting entry would be:
Dec 31 Rent Expense 1,500.00

Rent Payable 1,500.00

Example 2: VIRON Company borrowed $6,000 at 12% interest on August 1, 2017. The amount will be paid after 1 year. At the end of December, the
end of the accounting period, no entry was entered in the journal to take up the interest.

Let's analyze the above transaction.

VIRON will be paying $6,000 principal plus $720 interest after a year. The $720 interest covers 1 year. At the end of December, a part of that is already
incurred, i.e. $720 x 5/12 or $300. That pertains to interest for 5 months, from August 1 to December 31. The adjusting entry would be:

Dec 31 Interest Expense 300.00

Interest Payable 300.00

Expenses are recognized when incurred regardless of when paid. What you need to remember here is this: when it has been consumed or used and no
entry was made to record the expense, then there is a need for an adjusting entry.