Accrued Expenses Journal Entry: How to Record Accruals
Learn how to record accrued expenses with journal entries. Covers the concept of expense recognition under accrual accounting, with examples for wages, interest, and utilities.
Scenario
On December 31 (year-end), DEF Company needs to record three accrued expenses: (1) Employees earned $8,000 in wages for December 28-31 that won't be paid until January 5. (2) A $100,000 note payable at 6% annual interest has $500 of accrued interest for December. (3) The December electric bill of $1,200 has been received but won't be paid until January 15.
Journal Entries
Accrued wages — Employees earned wages in December but payment occurs in January. The expense belongs in December under accrual accounting.
| Account | Debit | Credit |
|---|---|---|
| Salaries and Wages Expense | $8,000 | |
| Salaries and Wages Payable | $8,000 |
Accrued interest — Interest has been incurring on the note during December. Even though no payment is due yet, the expense must be recognized in the period it was incurred.
| Account | Debit | Credit |
|---|---|---|
| Interest Expense | $500 | |
| Interest Payable | $500 |
Accrued utilities — The electric service was consumed in December. The bill has been received, confirming the amount owed.
| Account | Debit | Credit |
|---|---|---|
| Utilities Expense | $1,200 | |
| Accounts Payable | $1,200 |
Explanation
Accrued expenses are costs that have been incurred but not yet paid. Under accrual accounting (required by GAAP and IFRS), expenses must be recognized in the period they are incurred, regardless of when cash changes hands. This follows the matching principle — expenses should be recorded in the same period as the revenue they helped generate. The adjusting entry always debits an expense account (increasing expenses on the income statement) and credits a payable account (increasing liabilities on the balance sheet). When payment is eventually made, the payable is debited and cash is credited.
Variations
If the accrued interest calculation covers a partial month: Interest = Principal × Rate × (Days/365). For example, 15 days on a $100,000 note at 6%: $100,000 × 0.06 × (15/365) = $246.58.
For accrued rent: If rent of $3,000/month for December hasn't been paid yet, Debit Rent Expense $3,000, Credit Rent Payable $3,000.
Common Mistakes to Avoid
- ✗Forgetting to record accrued expenses at year-end, which understates both expenses and liabilities
- ✗Confusing accrued expenses (expense incurred, not yet paid) with prepaid expenses (cash paid, not yet incurred)
- ✗Recording the cash payment date as the expense date instead of the period the expense was incurred
- ✗Not reversing the accrual in the next period, leading to double-counting when the actual payment is recorded
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Common questions about this journal entry
Technically, accrued expenses are a type of payable. In practice, Accounts Payable usually refers to amounts owed for goods received with an invoice, while accrued expenses refer to amounts owed for services consumed where no invoice has been formally received (like accrued wages or interest). Both are current liabilities.
Because no transaction has occurred to trigger a journal entry. The expense builds up over time (wages accrue daily, interest accrues continuously) without a payment event. The adjusting entry ensures the financial statements reflect the true expense for the period.
When the actual payment is made, you debit the payable account (eliminating the liability) and credit Cash. Some companies use reversing entries at the start of the new period to simplify this process.