Accrued expenses

• An accrued expense is when the expense for the period is more than the cash paid during the period.

  Expense is incurred but unpaid

  it is a current liability
• accrued expense applies matching convention
• matching convention & accrued expenses:

  accrued expense is a benefit that an entity has received, but has not yet been invoiced / nor paid.

  it is an incurred expense that is unpaid.
• accrued expenses appear in the SOFP as current liabilities
• when the actual invoice is recorded and paid for in the next period, the accrued expenses reverses
• what is the journal entry:

  abc corporation has a fiscal year from the 1st of January to 31st December

  for the month of December employees need to be paid salary of £25000.

  the salary is paid only on 5th January

  what is the entry on 31st December?

  31st December :

  Dr salary expense 25,000

  Cr accrued expense (think of it as salary payable) 25,000
• Harry Potter LTD starts trading on

  1/1/20X0 and incurs telephone charges of £200/month

  its year end date is 31st December and its next quarterly telephone bill is due on 10/1/2021.

  by 31st December 20X0 three telephone bills totalling £1800 were received, paid and charged to the income statement. 


  Dr telephone expense 600

  Cr accrued expense 600
• In the income statement we show:

  the expenses recorded & already paid for

  accrued expenses are added

  total it
• in the SOFP at the year end we add the accrued expense
• in the cash flow statement we deduct the accrued expense
• Prepayment: Firm abc brought insurance for 3 years on 1.1.20X0 for £3000 what will be the correct balances in the statement of financial position and income statement as on 31/12/20X0 after adjusting entries

  SOFP: prepaid insurance : 2000

  Income statement : insurance expense 1000