What Are Accrued Expenses?
Accrued expenses are unpaid expenses that your business accumulates within a particular period. This makes them the opposite of prepaid expenses. Accrued expenses can also be referred to as accrued liabilities, as they track the money that the business owes. For this reason, they are added to the accounting books as current liabilities.
It's important to note that accrued expenses are added to the books when they are first incurred, which follows the accrual method of accounting. In other words, these expenses might appear before an actual invoice is received. For this reason, these expenses are also estimates.
As a small business owner, you want to carefully track your accrued expenses. Accrual accounting will help you better plan and allocate your expenses so you can grow your business. Skynova offers straightforward accounting software to help small businesses manage their accounting.
We'll walk you through what you need to know about accrued expenses with the accrual method, including why they are important and how to record them, to help you move forward confidently with your small business accounting.
Which Expenses Are Accrued?
Accrued expenses, or accrued liabilities, are the estimated expenses that businesses expect they will owe but for which they have not yet received an invoice or a bill within that particular accounting period. Since no invoice has been recorded, the estimated amount may need to be adjusted when the actual invoice or bill arrives.
Therefore, accrued expenses can be any expense the business has or payment it must make at a later date.
What Is an Example of an Accrued Expense?
Accrued expenses can occur in a variety of situations regarding your small business, such as the interest expense on a loan to charges you incur because someone completed work for your business.
Other accrued expenses include:
- Any accrued interest on any business loans you owe to lenders
- Charges related to goods received
- Charges related to services received
- The wages you will pay your employees
- The taxes you pay to state and federal agencies
- Commissions you will need to pay
- Utility fees you incur from your business
- Rent you pay for your physical location
- Bonuses to your employees
- The costs associated with customer warranties
To better understand how accrued liabilities work, let's take a look at two examples and how their particular expense should be properly noted.
Consider, for example, an organic soap company. The business focuses on gathering various organic ingredients, including scented oils, to attract customers.
Unfortunately, a machine that mixes the soap breaks down and the business has to call out a repair person. The repair person is able to repair the machine and gets it ready to mix soap again before the end of the day. At the time of service, the soap business receives an invoice from the repair company. Since they have the total invoice, they will simply add this expense to their accounts payable and the invoices they have on file to be paid.
In the second example, let's say we have a store owner. This store owner has their air conditioning break in the middle of the summer. This makes it unbearably hot in the store and impacts their ability to attract customers to browse.
To get the problem corrected as quickly as possible, the store owner calls an HVAC repair technician and encourages them to come as quickly as possible. After assessing the repair needed, the repair technician provides an estimate of how much he expects the work to cost.
He does an excellent job and the air conditioning is running again in no time. A few weeks later, at the end of the accounting period, however, the store owner still hasn't received an invoice (though they do have an estimate). They can add the estimate to the other accruals and find their total for accrued expenses.
Are Accrued Expenses on the Income Statement?
Your accrued expenses often appear in accounts payable. They are the expenses your business has that you haven't paid for yet. Therefore, they can still impact your business's income statement.
An accrued expense will be listed as a liability account on your company's balance sheet. Therefore, your accrued expenses will increase along with the expense account on your income statement, showing up as deductions on the net income statement. However, when you pay down your accrued expenses at a later date, it won't impact your income statement because the amount has already been accounted for.
How Do You Record Accrued Expenses?
Recording an accrued expense requires knowing the type of expense and where the funding will come from. You will be making your notations for an accrued expense in two columns, debiting the expense account and crediting the accrued expense account.
For small businesses looking to keep track of their accounting, Skynova's accounting software makes it easy to add new journal entries to your general ledger. You can easily indicate which accounts will fund the various accrued liabilities to keep track of the flow of money through your business.
Create a New Journal Entry
To get started, you will want to bring your information together regarding the expense you need to mark in your journal entry. Make sure your estimate is as accurate as possible, such as using an estimate from a contractor to determine the likely charge for work around the store or last year's tax-to-income ratio to estimate your tax liability for the upcoming year.
Add a Debit to the Expense Account
You will then want to debit the expense account that supplies the funds to cover this particular accrued expense. For example, you will need to debit funds you set aside for wages payable, including salaries and bonuses, to indicate where impending payments will come from. You should also have money set aside to cover your tax burden or interest payable. You may also need to debit your tax expense account as you indicate your accrued expense related to your tax burden.
Indicate in the journal entry which account you will debit the funds from and the amount.
Apply a Credit to the Accrued Expenses Account
The last step is to credit the accrued expense account. In this account, you will credit the account for the amount of the accrued expense. If the accrued expense total comes from an estimate made now while waiting for an invoice and the invoice ends up having a different total, the amount listed as you record this particular expense may call for adjusting journal entries.
Let Skynova Help You Manage Your Small Business's Financial Statements
When it comes to managing expenses for your small business, understanding the role of the accrual basis of accounting and how to track accrued liabilities on your balance sheet from one month to the following month plays an important role in bookkeeping and maintaining your cash flow.
Fortunately for small business owners, Skynova's accounting software can help simplify their accounting systems and keep careful track of expenses and income. This makes it easier to monitor your financial health as a bookkeeper.
With Skynova's business templates and software products, businesses have what they need to keep their books accurate and prepare themselves for growth. Small business owners interested in building a strong, stable organization should consider the value that our modules can offer businesses just like yours. Explore our platform and give us a try today.
Notice to the Reader
The content within this article is meant to be used as general accounting guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards for your business.