key term - Accrued expenses

Definition

Accrued expenses are costs that have been incurred but not yet paid by the end of an accounting period. They are recorded as liabilities on the balance sheet and recognized as expenses in the income statement when incurred, regardless of when payment is made.

5 Must Know Facts For Your Next Test

1. Accrued expenses need to be adjusted at the end of the accounting period to match revenues with expenses.
2. Common examples include wages payable, interest payable, and utilities payable.
3. They follow the accrual basis of accounting which recognizes expenses when they are incurred, not when they are paid.
4. Accrued expenses increase liabilities on the balance sheet and decrease net income on the income statement.
5. Failing to record accrued expenses can result in understated liabilities and overstated net income.

Review Questions

Related terms

Prepaid Expenses:

Costs that have been paid in advance for goods or services to be received in future periods.

Deferred Revenue:

Money received by a company for goods or services not yet delivered or performed.

Adjusting Entries:

Journal entries made at the end of an accounting period to update account balances before financial statements are prepared.