Accrued Expenses

Accruals principle: Fundamental accounting principle that states that income and expenses shown in the statement of profit or loss should be those that were earned or incurred during the period rather than simply the cash received or paid.

Accrual: Expense or income that has been incurred or earned during that period but that has not yet been invoiced or paid/received.

Accrued expenses: expenses that have been incurred during the period but that have not yet been invoiced or paid, ie expenses in arrears.

Period-end adjustments for accruals and prepayments tend to occur at the end of the year. If they are not made automatically by the accounting software package, they are made by way of journal entry.

Accrued expense have a dual effect that needs t be accounted by:

1. Increasing the relevant expense account in the SPL

2. Recording a current liability called ‘accrued expenses’ (accruals) in the SFP for amounts owing at the end of the year.

The journal to post accrued expenses in the general ledger is:

Statement of Financial Position presentation: accruals or accrued expenses are a liability of the business and are sown in the statement of financial position within the current liabilities section.

How to approach exam tasks:

Calculate the expense for the year:

a) Review all the invoices listed in the question and identify which invoices relate to the current year

b) If the invoice relates to the current year, include the full amount of the invoice in expenses

c) If an invoice has been received after the year end, check whether some or all of it relates to the current year and add any portion relating to the current year to expenses (pro-rate where necessary)

Calculate the accrued expenses at the end of the year:

a) Review the task for any invoices received after the year end

b) Check whether some or all of that invoice relates to the current year; if so, calculate the portion of the invoice that relates to the current year - that is the accrued expense.

Recording the accounting entries:

1. Record invoices paid in the year by:

2. Record accrued expenses by:

3. Balance off the Bank and Accrued expenses accounts by showing the balance c/d and b/d and balance off the expense account by showing the transfer to profit or loss.

Reversal of accrued expenses:

Reason for reversal of accrued expenses:

At the beginning of the following period there will be a balance b/d in the accrued expenses (SFP) account. This will be a credit balance as the accrued expenses account is a liability account. The related invoice will be paid during this next accounting period and therefore recorded in expenses:

However, the expense has already been recorded in the prior year to which it relates. Therefore, this expense needs to be removed by reversing the balance b/d on the accrued expenses (SFP) account:

How to approach exam tasks with reversals of accrued expenses:

1. Read through the ask to identify whether there is an accrued expense balance brought down from the previous year.

2. Reverse any balance b/d on the accrued expense account:

3. Record all invoices paid in the current year:

4. Scan the task for any invoices received after the year end which relate to the current year - if only part of the invoice relates to the current year, pro-rate the amount to calculate the year-end accrued expense.

5. Record the year-end accrued expense by:

6. Balance off the expenses account by transferring the balancing figure to the profit or loss and balance off the accrued expenses account by carrying the balance down.