The situation, therefore, is that the trial balance states that telephone expenses for the year amounted to $3,460 however, in fact, the true telephone expense for the year was $4,330 ($3,460 + $870).Įven though the December bill has not been recorded in the books, the fact is that the service has been received, and hence expenses incurred. balance of $3,460 (as above).Īfter the trial balance had been drawn up, the December bill arrived, which was for $870. The telephone account, therefore, showed a Dr. The bill for December had not been received by 31 December 2019 when the ledger was balanced and a trial balance extracted. Bill for November, received and paid in December: $960.Bill for October, received and paid in November: $910.Bill for September, received and paid in October: $840.Bill for August, received and paid in September: $750.John installed a telephone in his shop in August 2019. This is performed by recognizing an accrued payable and a corresponding expense item. However, to simplify the accounting process, they are recorded only at the end of the accounting period. Like accrued revenues, the accrued expenses occur continuously. The trial balance will, of course, have no record of the bill, and yet it would be wrong to ignore the expense involved when preparing the year's profit and loss account.Īccrued expenses include items such as interest expenses, salaries, tax expenses, rental expenses, or any other expenses incurred in one accounting period that will be paid in subsequent periods.Īdjusting entries must be made for these items in order to recognize the expense in the period in which it is incurred, even though the cash will not be paid until the following period. It is common for bills to be received after the end of the year, which actually relate to a service received before the year-end. Thus, in most cases, the balances on expense accounts such as electricity, telephone, and wages, as shown in the year-end trial balance, represent the amounts actually paid out during the year. For example, the first accounting entry to record an electricity expense is made not when an electricity bill is received, but when it is paid. Most businesses record expenses in their books of accounts only when they are paid. Accrued expenses are expenses that have been incurred (i.e., whose benefit or services have already been received) but which have not been paid for.Īn alternative definition of accrued expenses is that they are expenses that have been incurred but not recorded, necessitating adjusting entries and the inclusion of items such as interest expenses, salary expenses, and tax expenses.
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