Accrued Expenses

Accrued expenses are expenses which has been incurred but at the end of the accounting period not yet recorded in the accounting ledgers by the normal transaction process.

A business has an annual premises rent of 12,000 but an invoice has not been received from the landlord and the rental expense has not been recorded in the accounting records.

Accrued Expenses Journal Entry

At the end of the month the business needs to accrue the cost of the rent for that period, the accrued expenses journal entry is as follows:

Accrued Expenses Journal Entry
Account Debit Credit
Rent expense 1,000
Accrued expense 1,000
Total 1,000 1,000

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Accrued Expense – Accounting Equation
Assets = Liabilities + Owners Equity
None = Accrued expenses + Rent expense
0 = 1,000 + -1,000

In this case the balance sheet liabilities (accrued expenses) has been increased by 1,000, and the income statement has a rent expense of 1,000. The expense reduces the net income, retained earnings, and therefore owners equity in the business.

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