Definition: Accrued expenses are costs that are incurred in the current period but not paid for until the next period. In other words, it’s an expense that the company has benefited from but hasn’t paid for or recorded yet. This is why an accrual is recorded as a liability at the end of a period. It’s the amount of expenses owed to another company.
What Does Accrued Expenses Mean?
What is the definition of accrued expenses? The most common form of accruals is a monthly expense like rent or utilities that are consumed throughout the month and paid for on first of the following month. Let’s take rent for example. The business benefits from the rent expense all month, but it doesn’t actually pay for it until the next month. According to the accrual basis of accounting, expenses must be recorded when they are incurred, not necessarily when they are paid. Thus, the business should record an expense for its rental costs in the current month even though it hasn’t actually paid the rent yet.
Let’s take a look at the adjusting journal entries to record an accrued expense.
Example
Calvin’s Design Studio rents out a design space in a downtown apartment complex for $2,000 a month. Each rent payment is due on the first of the month for the prior month’s rent. This means that Calvin’s December month’s rent is due in January.
At the end of the year, Calvin’s income statement only shows 11 monthly rent payments because his December month’s rent hasn’t been recorded yet. This income statement is obviously misstating his rent expense for the year because he incurred 12 months worth of rental costs.
An adjusting journal entry is recorded at the end of the accounting cycle to accrue the December rent expense by debiting the rent expense account and crediting the accrued expense liability account. This journal entry records the rental costs for the month as well as the amount of month that Calvin owes his landlord at the end of the year.
Summary Definition
Define Accrued Expenses: Accrued expense means a liability that a company owes another company because it has received goods or services and has not paid for them in the current period.
