Accrued expenses are referred to as those expenses that are incurred, but are not paid. In other words, these are expenses which are recorded as expenses in company records, even before payment for the same has been done.
Accrued expenses are short-term liabilities or current liabilities that are recorded in the balance sheet of the company. These are also known as accrued liabilities.
Accused expenses will be recorded in the accounting records only when the company follows the accrual basis of accounting. Accrual accounting is better than cash basis accounting as it helps in revealing a company’s financial position more accurately.
In this system of accounting, the expenses must be recorded in the same accounting period in which it is incurred.
Examples of Accrued Expenses
Following are some of the examples of accrued expenses:
- Salaries and wages
- Rent payable
- Interest payable
- Tax payable
Accounting Treatment of Accrued Expenses
The accounting treatment of accrued expenses is as follows:
If Interest payment is due for an amount of ₹1000, then it will be recorded as
Interest Expense Dr. 1000
To Interest payable 1000
When this amount will be paid the accounting entry will be as follows:
Interest Payable Dr. 1000
To Bank 1000
Advantages of Accrued Expenses
- It helps in establishing the real financial position of the company.
- As and when transactions are conducted, it gets recorded in the accounts, which makes it less prone to errors.
- It is a more accurate basis of recording transactions as it is based on the double entry system of accounting.
Disadvantage of Accrued Expenses
- It becomes difficult for accountants to maintain track of the number of transactions taking place in a large business organisation.
This concludes the topic of Accrued Expenses which is an important topic for Commerce students. For more such topics, stay tuned to BYJU’S.
Important Topics in Accountancy: