Accrued Expense Journal Entry at Month-End
Learn how to record accrued expenses during the month-end close when services have been consumed but no invoice has arrived. Covers estimation, accrual posting, and cleanup when the actual bill comes in.
Learn how to record accrued expenses during the month-end close when services have been consumed but no invoice has arrived. Covers estimation, accrual posting, and cleanup when the actual bill comes in.
Scenario
At November 30, Ridgeway Manufacturing identifies three uninvoiced expenses: (1) November electricity estimated at $1,800 based on prior months. (2) A $4,200 consulting engagement completed November 22 — invoice expected mid-December. (3) Raw materials received November 28 worth $7,500 — invoice in transit from supplier.
Journal Entries
November 30 — Accrue estimated utilities. The meter ran all month but the bill won't arrive until mid-December. Use the 3-month average ($1,750 + $1,900 + $1,750 = $5,400 / 3 = $1,800) as a reasonable estimate.
| Account | Debit | Credit |
|---|---|---|
| Utilities Expense | $1,800 | |
| Accrued Liabilities | $1,800 |
November 30 — Accrue consulting fees. The engagement is complete and the amount is contractually defined, so $4,200 is exact rather than estimated.
| Account | Debit | Credit |
|---|---|---|
| Consulting Expense | $4,200 | |
| Accrued Liabilities | $4,200 |
November 30 — Accrue received-not-invoiced inventory. Goods are on the dock and the packing slip confirms $7,500. Record the asset and the payable.
| Account | Debit | Credit |
|---|---|---|
| Raw Materials Inventory | $7,500 | |
| Accounts Payable — Accrued | $7,500 |
December 15 — Actual utility bill arrives at $1,860. Clear the accrual and record the $60 difference as additional expense.
| Account | Debit | Credit |
|---|---|---|
| Accrued Liabilities | $1,800 | |
| Utilities Expense | $60 | |
| Accounts Payable | $1,860 |
Explanation
Month-end accruals ensure that expenses appear in the period the economic event occurred, not when the paperwork arrives or the check is written. Without November accruals, Ridgeway's November income statement would understate expenses by $13,500 and December would overstate them by the same amount — making neither month's financial picture accurate. Three common accrual scenarios appear here: (1) estimated amounts when no invoice exists (utilities), (2) known amounts for completed-but-unbilled work (consulting), and (3) goods received without accompanying invoices (inventory). When the actual invoice arrives and differs from the estimate, the difference hits the current period's expense — not a correction to the prior period. Small estimation variances are expected and acceptable; the accrual still achieved its purpose of placing the expense in the correct month.
Variations
If the company uses reversing entries: Post a reversing entry on December 1 (debit Accrued Liabilities, credit the expense accounts). When the actual invoices arrive, record them normally — the expense account will net to the correct amount for December.
If the actual consulting invoice is $3,800 instead of $4,200: Clear the $4,200 accrual and credit $400 to Consulting Expense in December, reducing December's expense by the overestimate.
If goods were received but the packing slip is unclear on price: Use the purchase order price as the best estimate. Adjust when the invoice confirms the actual amount.
Common Mistakes to Avoid
- ✗Skipping accruals for expenses that are 'coming soon' — the matching principle doesn't wait for invoices to arrive
- ✗Double-counting the expense when the actual invoice arrives if the accrual wasn't properly cleared or reversed
- ✗Using wildly inaccurate estimates without support — auditors expect accruals to be based on contracts, historical data, or purchase orders
- ✗Posting accruals without a support schedule, making it impossible to clear them accurately when invoices arrive
FAQs
Common questions about this journal entry
The matching principle requires recognizing expenses in the period incurred, even if the amount must be estimated. A reasonable estimate (based on contracts, prior bills, or purchase orders) in the correct period is more accurate than an exact amount in the wrong period. Small variances are adjusted when the actual invoice arrives.
Debit the Accrued Liabilities account for the original estimate, debit (or credit) the expense account for any difference from the actual amount, and credit Accounts Payable for the invoice total. If you use reversing entries, the accrual auto-reverses on day one and the invoice is posted normally.
Accounts payable usually has a formal invoice as documentation. Accrued liabilities cover expenses where no invoice has been received but the cost is known or estimable. Both are current liabilities. Some companies combine them on the balance sheet; others report them separately for visibility.
Not necessarily. Reversing entries work well for recurring accruals where the next-period payment will naturally cover the amount (wages, utilities). For one-time accruals like a consulting project, it may be simpler to clear the accrual directly when the invoice is processed rather than reversing and re-recording.
Accruals increase current liabilities and reported expenses. This means the current ratio decreases slightly and net income decreases compared to cash-basis reporting. However, these effects reflect economic reality more accurately — the company truly owes these amounts and truly incurred these costs during the period.