If you know what Accruals and Expenses are, do you know how to record them in the accounts?
I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at how to record accrued expenses in double entry.
As previously mentioned in the video on “What are Accruals and Prepayments?” an accrual
is an adjustment to match the expenses used in a period.
Accruals play a vital role to make sure that the financial records show a true and fair
reflection of an organisation and its activities.
An accrued expense is where the amount paid is lower than the amount of expenses incurred.
The amount still owing is accrued and since it actually belongs to this current period
it must be added to the amount already paid.
This follows the principle for treating accruals, as also mentioned in the video on “What
are Accruals and Prepayments?”, whereby accruals you add and for prepayments you deduct.
So, accruals add, prepayments deduct.
Let’s look at some examples to demonstrate accrued expenses.
Rent for the shop of Ben the baker for the financial year is £16,000. It has been agreed
from the start that the rent is to be paid quarterly to the landlord.
However, at the end of the year, payment for the last quarter is still owing.
How do we record this in Ben’s accounts?
First of all, here is a table showing when the rent was due and when the rent was paid.
As you can see rent was paid each quarter during the year on 31st March, 30th June and
30th September, except for the last quarter. It was owed on 31st December 2017 but was
not paid until 10th of January 2018.
Let’s add the information for the first three quarters like so.
The rent for the last quarter was paid on the 10th of January 2018 and so will appear
in the accounts of 2018, which is the next trading year of the business.
The rent expense for 2017 is £16,000 for the year of rent and since that the Accruals
and Matching concept states that the expenses and income recorded in the accounts should
relate to the time period of those accounts.
At the end of the trading year, the yearly rent amount is to be transferred to the profit
and loss account. But if £16,000 was put on the credit side of the rent account like
so the account would be out of balance by £4,000 because the payment was due on 31st
December 2017 and was not made until 10th January 2018.
If we were to post the £16,000 to the profit and loss account, we would have £16,000 on
the credit side and only £12,000 on the debit side.
Something seems wrong here! Therefore, to make the account balance the £4,000 rent
owing in 2017 but paid in 2018 must be carried down to 2018 as a credit balance because it
is a liability on 31st December 2017.
Instead of rent owing it can be called rent accrued or simply an accrual. Therefore the
rent account for Ben the baker can now be shown as this…
Additionally, the balance c/d can be called accrued carried down and this is to explain
what the balance is for, for an accrued expense.
So that was the explanation of how to record accrued expenses in double entry. If you enjoyed
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