Lecture Notes: Accrued Expenses in Accounting

Introduction to Accrued Expenses

Definition: An accrued expense is an expense that a business has incurred but not yet paid. It is recorded in accounting records prior to cash being paid.
Common Examples: Salaries expense (when payday has not yet arrived) and interest expense (charged but not paid yet).
Key Point: Accrued expenses always create an accrued liability.

Expense Recording: Increases expenses, thereby decreasing equity.
Liability Recording: Increases a liability account (e.g., salaries payable, interest payable).
Corporations typically record these at the end of an accounting period through adjusting entries rather than daily or weekly.

Example Company: Smart Touch Learning.
Salary Payment Schedule: Employees are paid $2,400 monthly, split half on the 1st and half on the 15th.
December Scenario:
- December 15: Simple journal entry with $1,200 salaries expense (debit) and cash (credit).
- December 31: Adjusting entry for accrued salaries expense.
  - Record $1,200 salaries expense (debit) and $1,200 salaries payable (credit).
  - Ensures expenses are recorded in the correct period for financial statements.
January 1 Payment:
- Do not record the expense again to avoid double-counting.
- Entry involves reducing the liability with a debit and cash with a credit.

Scenario: Smart Touch Learning recorded a $60,000 note on December 1.
Interest Calculation: Interest on the note is calculated with:
- Principal ($60,000) x Interest Rate (2%) x Time (1/12 of a year).
- Results in a $100 interest expense for December.
Adjusting Entry: On December 31, record:
- Interest expense (debit) $100
- Interest payable (credit) $100
Importance: If not recorded, financial statements will understate liabilities on the balance sheet and expenses on the income statement.

Review: Understanding and recording accrued expenses like salaries and interest is crucial to ensure accurate financial statement reporting.
Final Thought: Proper recording follows the accrual basis of accounting, adhering to revenue recognition and matching principles.