Accrued Expenses vs Accrued Revenues: Journal Entries and Adjusting Entry Examples

Accrual accounting says you recognize revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. Accruals are the adjusting entries that make this happen at period end when cash has NOT yet been received or paid. **Accrued expenses** are expenses that have been incurred but not yet paid in cash. You used the service or consumed the resource in this period — you just haven't written the check yet. Classic examples: wages earned by employees at month-end but payable next month, interest that has accumulated on a loan but isn't due yet, utility bills that cover the current month but arrive next month, and taxes that accumulate through the year but are paid quarterly. **Accrued revenues** are revenues that have been earned but not yet collected in cash. You delivered the service or transferred the product — you just haven't billed or received payment yet. Examples: interest earned on investments that hasn't been received, services performed for a client who will be billed at month-end, and subscription revenue earned pro rata through the period. The adjusting entries at period end follow a consistent pattern: **Accrued expense adjustment**: DEBIT an expense account (increases expense), CREDIT a liability account (increases what you owe). **Accrued revenue adjustment**: DEBIT an asset account (increases receivables), CREDIT a revenue account (increases revenue). When cash eventually moves in the next period, you REVERSE the liability or asset and record the cash movement. The total effect across both periods is the same as if cash had been paid/received in the original period — accruals just split the transaction to recognize economic activity in the right period. Snap a photo of any accrual problem and AccountingIQ builds the T-accounts, writes the adjusting entry, and shows the subsequent cash entry step by step — including the reversal logic that trips up most students. This content is for educational purposes only and does not constitute financial advice.

Let's work through the three most common accrued expenses with complete journal entries — the period-end adjusting entry AND the subsequent cash payment entry. **Example 1: Accrued Wages (Salaries Payable)** Scenario: ABC Company pays employees every two weeks. On December 31 (year-end), employees have worked 5 days since the last payday. Daily wage expense is $2,000 (5 days × $2,000 = $10,000). The next payday is January 8, when employees will be paid for those 5 days plus 5 more days in January. **December 31 adjusting entry** (accrue 5 days of wages earned but not yet paid): DR Wages Expense .......... $10,000 CR Wages Payable .......... $10,000 This puts $10,000 of wage expense on December's income statement (matching it to the period when the work happened) and records a $10,000 liability on the December 31 balance sheet. **January 8 payment entry** (when the full $20,000 bi-weekly payroll is paid): DR Wages Expense .......... $10,000 (5 days in January) DR Wages Payable .......... $10,000 (the December accrual we recorded) CR Cash .......... $20,000 Notice that the Wages Payable liability gets CLEARED (debit) when the cash is paid. The $10,000 of January wages goes to expense. The net result: December got $10,000 of expense, January got $10,000 of expense — correct period matching. **Example 2: Accrued Interest on a Loan** Scenario: DEF Corp borrowed $100,000 at 6% annual interest on October 1. Interest is paid annually on September 30 of the following year. At December 31, three months have passed, so interest has accumulated. Interest calculation: $100,000 × 6% × (3/12) = $1,500 **December 31 adjusting entry**: DR Interest Expense .......... $1,500 CR Interest Payable .......... $1,500 **September 30 (next year) payment entry** (pay the full year of interest $6,000): DR Interest Expense .......... $4,500 (nine months earned in current year) DR Interest Payable .......... $1,500 (the prior-year accrual) CR Cash .......... $6,000 **Example 3: Accrued Utilities (Utilities Payable)** Scenario: GHI Inc estimates that December electricity usage totals $800. The bill will arrive in mid-January for December usage. **December 31 adjusting entry**: DR Utilities Expense .......... $800 CR Utilities Payable .......... $800 **January 15 payment entry** (when the $800 bill is paid): DR Utilities Payable .......... $800 CR Cash .......... $800 Notice: no additional expense is recorded on January 15 because the expense was already recognized in December. This is the key concept — accruals shift the expense recognition to the correct period, and the cash payment just clears the liability. **Common mistake**: students often record the full bill amount as expense when the cash payment occurs, double-counting. If you've already accrued the expense, the cash payment only touches the liability account (not expense). AccountingIQ walks through each of these examples with detailed T-accounts showing how the accounts flow across both periods.

Accrued revenues work as the mirror image of accrued expenses. You earned the revenue but haven't collected cash yet. Let's work through three common scenarios. **Example 1: Accrued Service Revenue (Accounts Receivable)** Scenario: JKL Consulting performs 40 hours of consulting at $150/hour during December but will invoice the client on January 5 with net-30 payment terms. Revenue earned: 40 × $150 = $6,000 **December 31 adjusting entry** (recognize revenue earned but not yet billed): DR Accounts Receivable .......... $6,000 CR Service Revenue .......... $6,000 This puts $6,000 of revenue on December's income statement (matching the work to the period when it was performed) and records a $6,000 receivable asset on the December 31 balance sheet. **February 4 collection entry** (when the client pays the invoice): DR Cash .......... $6,000 CR Accounts Receivable .......... $6,000 The receivable gets cleared. No additional revenue is recorded because we already recognized it in December. **Example 2: Accrued Interest Revenue** Scenario: MNO Company has a $50,000 note receivable at 8% annual interest. Interest is received annually on June 30. At December 31, six months have passed since the last interest receipt. Interest calculation: $50,000 × 8% × (6/12) = $2,000 **December 31 adjusting entry**: DR Interest Receivable .......... $2,000 CR Interest Revenue .......... $2,000 **June 30 (next year) collection entry** (receive full year of interest $4,000): DR Cash .......... $4,000 CR Interest Receivable .......... $2,000 (the prior-year accrual) CR Interest Revenue .......... $2,000 (six months earned in current year) **Example 3: Accrued Subscription Revenue** Scenario: PQR Software signs a client on November 1 for a six-month subscription at $12,000 ($2,000/month). The client will be billed and pay on April 30 at the end of the term. At December 31, two months of service have been delivered. Revenue earned in current year: 2 × $2,000 = $4,000 **December 31 adjusting entry**: DR Accounts Receivable .......... $4,000 CR Subscription Revenue .......... $4,000 **April 30 (next year) collection entry** (when the $12,000 is paid): DR Cash .......... $12,000 CR Accounts Receivable .......... $4,000 (clears the prior-year accrual) CR Subscription Revenue .......... $8,000 (four months earned in current year) **Compare to deferred revenue (the opposite case)**: if the client had paid the full $12,000 UPFRONT on November 1, it would be deferred revenue (a liability) and you'd recognize revenue as it's earned. Accrued revenue is when you've delivered first and will get paid later; deferred revenue is when you've been paid first and will deliver later. **Common student mistake**: confusing accrued revenue with deferred revenue. Remember: accrued = earned but not received. Deferred = received but not earned. AccountingIQ handles both accrued and deferred scenarios and flags which pattern applies based on the timing of cash and service delivery.

Some companies use **reversing entries** at the start of the new accounting period to simplify the subsequent cash transaction entry. Reversing entries are optional — most textbooks cover them but many real-world accounting systems don't use them. They're a high-yield exam topic because students often get them wrong. **What a reversing entry does**: on the first day of the new period, you reverse the prior period's adjusting entry. This moves the liability/receivable off the books temporarily. Then when the cash transaction happens, you just record the cash side normally against the expense/revenue account (not against the liability/asset). The net effect across all the entries is identical to not using a reversal. **Example with reversing entry (accrued wages)**: December 31 adjusting entry: DR Wages Expense $10,000 CR Wages Payable $10,000 January 1 REVERSING entry (undo the December adjustment): DR Wages Payable $10,000 CR Wages Expense $10,000 January 8 payroll entry (simply record cash paid as expense, ignoring prior accrual): DR Wages Expense $20,000 CR Cash $20,000 The net effect on January's books: $20,000 expense - $10,000 reversal credit = $10,000 of January expense. Same as without reversing. But the payroll entry is cleaner — you just record the whole paycheck as expense without needing to know whether an accrual was made last period. **Why companies use reversing entries**: automation and simplicity. The payroll system can record every paycheck as 'DR Wages Expense, CR Cash' without checking whether a prior-period accrual exists. The reversing entry neutralizes the effect at the start of the period. **When reversing entries are typically used**: - Accrued expenses (wages, interest, utilities) - Accrued revenues - Sometimes on unearned revenues that will be earned early in the next period - NOT typically used on prepaid expenses or depreciation (those are amortization patterns, not accruals) **The alternative without reversing entries**: you have to remember that an accrual was made and record the cash transaction using the liability/asset account. Students often forget this step and end up double-counting the expense or revenue. **Exam strategy**: read the problem carefully to see if reversing entries are being used. If the problem says 'the company does not use reversing entries,' you must track the prior accrual through to the cash transaction. If reversing entries are used, you can treat the cash transaction as a fresh entry and the net effect still works out correctly. **Common student mistakes on accruals**: 1. Forgetting the adjusting entry entirely — revenue or expense gets recorded only when cash moves, violating accrual accounting. 2. Double-counting — booking expense at the accrual AND again at cash payment. 3. Wrong account names — using 'Wages Expense' when the textbook calls it 'Salaries Expense' (either is usually fine, but use consistent terminology). 4. Sign errors — debit/credit reversed. Remember: expense and asset accounts increase with DEBITS. Liability and revenue accounts increase with CREDITS. 5. Timing errors — using the wrong number of days/months in the accrual calculation. AccountingIQ walks through problems both with and without reversing entries, showing the equivalent journal entries under each method.