Accrued Expense Journal Entry: Month-End Example
Walk through a realistic month-end accrued expense entry from initial accrual through reversal and payment. Covers wages, legal fees, and contractor costs with proper period matching.
Walk through a realistic month-end accrued expense entry from initial accrual through reversal and payment. Covers wages, legal fees, and contractor costs with proper period matching.
Scenario
At March 31, Parkway Inc. identifies three expenses incurred during March that haven't been paid yet: (1) Employee wages of $12,400 for March 27-31 (payday is April 5). (2) Outside legal fees of $3,500 for work performed in March, invoice expected in April. (3) A contractor's $6,000 invoice for March project work arrived March 28 but won't be processed until April. The company uses reversing entries for wage accruals.
Journal Entries
March 31 — Accrue employee wages earned but unpaid. Employees worked March 27-31 and will be paid April 5, but the expense belongs in March.
| Account | Debit | Credit |
|---|---|---|
| Salaries and Wages Expense | $12,400 | |
| Salaries and Wages Payable | $12,400 |
March 31 — Accrue legal fees for services received. Even though no invoice has arrived, the service was consumed in March and the amount can be reasonably estimated.
| Account | Debit | Credit |
|---|---|---|
| Legal Expense | $3,500 | |
| Accrued Liabilities | $3,500 |
March 31 — Record contractor invoice received but not yet paid. The invoice confirms the amount owed for March work.
| Account | Debit | Credit |
|---|---|---|
| Consulting Expense | $6,000 | |
| Accounts Payable | $6,000 |
April 1 — Reversing entry for wage accrual (optional, simplifies payroll processing). This reversal allows the full April 5 paycheck to be recorded normally.
| Account | Debit | Credit |
|---|---|---|
| Salaries and Wages Payable | $12,400 | |
| Salaries and Wages Expense | $12,400 |
Explanation
Month-end accruals capture expenses that belong in the current period but haven't triggered a payment yet. Without them, March expenses would be understated and April expenses overstated — distorting both periods. The three examples illustrate different levels of certainty: (1) wages are precisely calculable, (2) legal fees require estimation because no invoice exists yet, and (3) the contractor invoice provides a confirmed amount. All three share the same principle: if the economic event happened in March, the expense goes in March. Reversing entries are commonly used for recurring accruals like wages because they let the payroll department process the full paycheck normally without manually splitting amounts between periods.
Variations
If the company doesn't use reversing entries for wages: On April 5, debit Salaries and Wages Payable $12,400 and debit Salaries and Wages Expense for any additional April 1-5 wages, then credit Cash for the total paycheck.
If the legal fee estimate differs from the actual invoice: Record the difference as additional Legal Expense (or a credit to Legal Expense if overestimated) in the period the invoice arrives.
If the contractor invoice crosses a fiscal year-end: The accrual becomes more critical because it affects annual financial statements, tax returns, and audit accuracy.
Common Mistakes to Avoid
- ✗Skipping the accrual because 'we'll pay it next week anyway' — the timing of payment doesn't determine when the expense is recognized
- ✗Accruing expenses without supporting documentation or a reasonable estimate, which creates audit risk
- ✗Forgetting to reverse wage accruals, causing double-counting when the actual paycheck posts
- ✗Recording the contractor invoice in April when it arrived in March — the receipt date and service date both point to March
FAQs
Common questions about this journal entry
Accrue any expense where the economic event (work performed, service consumed, time elapsed) occurred during the current period but payment hasn't been made. Common candidates include wages, interest, rent, utilities, professional fees, and taxes. Many companies maintain a standard accrual checklist reviewed during each month-end close.
Accounts payable typically involves a formal invoice for goods or services received. Accrued liabilities cover situations where no invoice has been received yet but the expense is known or estimable — like wages earned through month-end or interest accumulating on a loan. Both are current liabilities; the distinction is mostly about documentation and certainty.
Not always. Reversing entries are optional and most useful for recurring accruals (wages, interest) where the next-period payment naturally covers the accrued amount. For one-time accruals like a legal fee estimate, it's often simpler to clear the accrued liability directly when the invoice arrives rather than reversing and re-recording.
Adjust in the period you discover the difference. If you accrued $3,500 for legal fees but the invoice comes in at $4,100, record an additional $600 of Legal Expense when the invoice is processed. Small estimation differences are normal and expected — the accrual still served its purpose of placing the expense in the correct period.
Under accrual-basis tax reporting (required for most businesses above a certain revenue threshold), accrued expenses are generally deductible in the period incurred if the all-events test and economic performance requirements are met. However, some accruals (like estimated litigation costs) may not be deductible until actually paid. Consult IRS rules for specific categories.