Require judgment and assumptions in estimation, which can introduce the potential for errors Improve transparency in financial statementsĭon’t impact cash flow until they are paid, which could create discrepancies with a company’s actual cash positionĮnable companies to manage their cash flow better by forecasting future cash outflows May overstate liabilities if not accurately estimated or recorded Provide access to more timely and relevant information for making strategic decisionsĬan add complexity to the accounting process, especially for companies with complex payment schedulesĬan provide a more accurate recognition of expenses for companies with irregular payment schedules or seasonal fluctuations in expenses Help in matching expenses accurately with the revenues they generateĬreate a difference between book and taxable income for companies using the cash-basis of accounting for income taxes The journal entry to record the accrued utility expense and related liability would be as follows: The company needs to make an adjusting entry at the end of January to recognize the utility expense that has been incurred but not yet paid. Let’s say a company estimates it used $1,500 of electricity for January, but the utility bill will not be received until February. The accrued liability will be paid on the next payday, January 6. At the same time, the company must recognize an accrued wages liability on its balance sheet for the amount owed to employees. This means the company recognizes the expense in the current accounting period by showing it as an expense on its income statement. In this scenario, the wages earned by employees from the 24th to the 31st of December would be recorded as an accrued expense. However, the actual payment to employees won’t occur until January 6, the last day of the pay period. On December 31, the company incurred wages expense for the days worked by employees from December 24 through December 31. However, the company’s accounting period ends on December 31. Assume the company has a pay period running from December 24 through January 6. To help you further, let’s suppose a company pays its employees twice a month, with paychecks being issued on the final day of the pay period. However, in accounting, an account labeled “Accrued Expense” always refers to the current liability account on the balance sheet.Ĭommon examples of accrued expenses are salaries, wages, bonuses, and commissions owed to employees, utilities consumed but not yet billed, and taxes incurred but not yet paid.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |