Expenses Unpaid For Accrual Purpose

October 23rd, 2008 Comments off
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This article deals with expenses unpaid for which are adjusting entries that for the final accounts or balance sheet

First, we look at what are some instances of expenses unpaid for,  how we take up such expenses and understand the accounting entries for over or under taking up of such accruals/accrued expenses.

 

Instances Of Expenses Unpaid, Impact And Term Used

 

1.       Company A has its month end close for reporting but payment of salaries are made only on every 15th of each month.

2.       Utilities expenses like water, electricity not received yet

3.       Workdone by professionals in stages

 

Remarks:

For 1:The balance of fifteen days needs to be taken up to match expenses with the revenue for the accounting month.

For 2: Expenses not timely received needs to be taken

For 3: We cannot wait for the completion of the workdone, hence the need to take up in stages of completion.

 

Impact:

  • If we do not take up the above unpaid expenses, then the accounting profit will be OVERSTATED

 

 

The word use to take up the relevant unpaid expenses is called accruing for the expenses or rather accrued expenses or accruals.

 

Accruing for expenses unpaid is in line with the matching of expenses with revenue for the relevant accounting period.  Click here to Accrual Concepts and Difference between Cash Basis Accounting Versus Accrual basis.

 

 

Accounting Treatment For Unpaid Expenses

 

    Debit the unpaid expense and Credit Accrual

Example No 1: Company A has its month end close on 30 th each month for reporting purpose but   payment of salaries are made on every 15th of each month.

 

Journal entries

Debit

Credit

Salaries

XX

 

Accrual for Salaries

 

XX

Being accrual for the fifteen days for the month

   Example No 2

Journal Entries

Debit

Credit

Water

XX

 

Electricity

XX

 

Accruals

 

XX

Being accrual for bills not yet received for the month of October 2008

   In example no 2, we can try to estimate the accrued expenses by looking at the preceding month figures or take the average of a few months figure to compute the accrual

 

 

When ACTUAL BILLS are received

 

  • Debit Accruals  &
  • Credit Creditors ( Sundry or Trade Creditors/ Accounts Payable)

 

 

Journal Entries

Debit

Credit

Accruals

XX

 

Sundry Or Trade Creditors

 

XX

Being actual bills now taken up where accrual being made

 

 

  In the event that the expenses are under accrued or over accrued:

 

   Under-accrued expenses:

 

   Debit :  More expenses into Income Statement

   Debit :  Accrual to reverse original entry

   Credit : Sundry or Trade Creditors ( where relevant)

 

Journal Entries

Debit

Credit

Accruals

XX

 

Expenses ( difference between actual & original accrued figure)

XX

 

Sundry Or Trade Creditors

 

XX

Being actual bills now taken up where accrual being made

 

 

   Over-accrued expenses:

 

  

   Debit :  Accrual to reverse original entry

   Credit : Overtaken expenses figures into Income Statement

   Credit : Sundry or Trade Creditors ( where relevant)

 

Journal Entries

Debit

Credit

Accruals

XX

 

Expenses ( difference between actual & original accrued figure)

 

XX

Sundry Or Trade Creditors

 

XX

Being actual bills now taken up where accrual being made

 

 

 

Click here for ALL articles on Adjustments To Final Accounts or Balance Sheet 

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Financial Accounting

 
 

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