2.3 Accrued Expenses & Accrued Liabilities
Key Takeaways
- Accrued expenses are costs incurred this period with no cash payment yet: debit the expense, credit a payable, and do not touch Cash in the adjusting entry.
- Wages earned since the last payday, unbilled utilities, interest on notes payable, and property taxes that accrue over the year are core examples.
- A reversing entry on the first day of the next period lets the full payday or vendor check hit expense the ordinary way; net expense in the new period is still only that period's share.
- If cash already created a prepaid asset, the cutoff entry credits the prepaid, not a payable — accruing a liability would double the cost.
- Skipping an accrual because the invoice has not arrived understates expenses and liabilities and overstates profit.
An accrued expense is a cost that has been incurred by the cutoff date even though you have not paid it and often have not received the vendor invoice. The adjusting entry increases an expense (which decreases equity) and increases a liability:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Period-end | Expense account (Salaries, Utilities, Interest, Property Tax) | Incurred amount | |
| Payable account | Incurred amount |
This is the mirror of accrued revenue. There, you earned before cash in. Here, you consumed before cash out. Matching says January labor that produced January work belongs in January, even if the payroll software does not print a check until February.
Worked example: wages across a Wednesday year-end
Piedmont Supply pays a $7,000 weekly payroll every Friday for a five-day workweek (Monday–Friday). Year-end is Wednesday, December 31, 2026. Employees have earned Monday, Tuesday, and Wednesday of that week; Thursday and Friday fall in 2027. Payday is Friday, January 2, 2027.
Three-fifths of the weekly payroll is a 2026 expense:
3/5 × $7,000 = $4,200
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Salaries Expense | 4,200 | |
| Salaries Payable | 4,200 |
T-accounts for this item:
| Salaries Expense (2026) | Salaries Payable | ||
|---|---|---|---|
| Regular 2026 checks (already posted) | Dec 31 adj. 4,200 | ||
| Dec 31 adj. 4,200 |
If you skip the accrual, 2026 salaries are $4,200 too low, 2026 liabilities are $4,200 too low, and 2027 salaries will absorb those three days when the January 2 check is expensed in full — so 2027 is $4,200 too high. Profit is shifted, not lost.
Payday without reversing
January 2 gross pay is still $7,000 cash (ignore withholdings here; payroll taxes are a later chapter). Split the check:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 2 | Salaries Payable | 4,200 | |
| Salaries Expense | 2,800 | ||
| Cash | 7,000 |
The $2,800 is Thursday–Friday (2/5 × $7,000). 2027 expense is only $2,800, which is correct.
Payday with reversing
Many bookkeepers reverse wage accruals so payroll can post the same way every Friday.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1 | Salaries Payable | 4,200 | |
| Salaries Expense | 4,200 | ||
| Jan 2 | Salaries Expense | 7,000 | |
| Cash | 7,000 |
January 1 credits Salaries Expense $4,200 (reducing 2027 expense). January 2 debits Salaries Expense $7,000. Net 2027 salaries from this week = $7,000 − $4,200 = $2,800. Same answer as the split-payday method. Reversing does not change totals; it changes how much thinking the next clerk needs to do.
If you reverse and still split the payday as Debit Payable $4,200 and Debit Expense $2,800, you will zero the payable twice and understate 2027 expense. Pick one method and document it.
Worked example: utilities estimated before the bill arrives
The December electric bill arrives January 8, 2027, for $365. At December 31 you do not have the bill. Last month was $358 and usage looks similar. Accrue a reasonable estimate — here $360 — because matching does not wait for the envelope.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Utilities Expense | 360 | |
| Utilities Payable | 360 |
When the $365 bill is paid on January 8 without reversing:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 8 | Utilities Payable | 360 | |
| Utilities Expense | 5 | ||
| Cash | 365 |
The $5 difference is a 2027 expense (estimate error). If you reversed on January 1 (Debit Utilities Payable $360; credit Utilities Expense $360) and then recorded the bill as Debit Utilities Expense $365; credit Cash $365, net January expense is $5, which is the same estimate error sitting in 2027. Either way, do not ignore December electricity because "the bill is not here." That is the incomplete-billing trap on the expense side.
Worked example: interest payable on a note
Piedmont borrowed $40,000 on November 1, 2026, on a 9 percent, six-month note. Interest is due at maturity (May 1, 2027). At December 31, two months have elapsed. Using 360 days (60/360) or 2/12 of a year:
$40,000 × 0.09 × 60/360 = $600
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Interest Expense | 600 | |
| Interest Payable | 600 |
This is the borrower's entry. Do not debit Interest Receivable. At maturity, five more months of interest will be recognized in 2027 before the cash interest payment. Total interest on a six-month note is $40,000 × 0.09 × 180/360 = $1,800, of which $600 belongs to 2026 and $1,200 to 2027.
Worked example: property tax accruing through the year
The city levies $9,600 of calendar-year property tax, payable in one installment on June 30 of the following year (in arrears). Piedmont's March 31 quarter-end statements must include three months of 2026 tax even though no check will go out until 2027.
3/12 × $9,600 = $2,400
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 31 | Property Tax Expense | 2,400 | |
| Property Tax Payable | 2,400 |
If the firm already accrues $800 each month, March 31 may need only that month's $800. The Certified Bookkeeper task is to inspect what is already in Property Tax Expense and Payable, then accrue the missing slice — not to post $2,400 on top of three monthly $800 entries.
| Month-end | Already on books | Additional accrual |
|---|---|---|
| January 31, nothing posted | $0 | $800 |
| March 31, no monthly accruals yet | $0 | $2,400 |
| March 31, January and February $800 each already posted | $1,600 expense | $800 |
The prepaid-versus-accrual trap
On January 1 Piedmont paid $1,200 for six months of insurance (January–June) and recorded Debit Prepaid Insurance $1,200; credit Cash $1,200. That cash entry is not an adjusting entry. At January 31, one month has been used: $1,200 / 6 = $200.
Correct deferral adjustment (Chapter 3 mechanics, shown because it is the trap): Debit Insurance Expense $200; credit Prepaid Insurance $200.
Wrong accrued-expense mimic: Debit Insurance Expense $200; credit Insurance Payable $200.
The wrong entry expenses insurance (so the income statement might accidentally look right) but leaves Prepaid Insurance at $1,200 and invents a $200 liability that will never be paid. Assets and liabilities are both overstated $200. You cannot fix it by also crediting Prepaid Insurance without creating a second $200 of expense. Diagnose with the decision tree: cash already hit the ledger for this policy, so it is a deferral, not an accrual.
The opposite miss is just as common. January electric was never prepaid and never recorded. There is no Prepaid Utilities account. You must accrue. Bookkeepers who just spent a week adjusting prepaids sometimes freeze and wait for the bill. Waiting is a cash-basis habit.
| Situation at January 31 | Cash already recorded? | Correct credit |
|---|---|---|
| January wages unpaid | No | Salaries Payable |
| January electric, bill not in | No | Utilities Payable |
| January insurance, policy prepaid Jan 1 | Yes — Prepaid Insurance | Prepaid Insurance |
| January rent, check written Jan 1 to Rent Expense by mistake | Yes — but to expense, not prepaid | That is an error-correction problem (later chapter), not a new accrual |
Other payday and vendor traps
- Debiting Cash on December 31 for accrued wages. The cash leaves on January 2.
- Expensing the full January 2 payroll in 2027 after failing to accrue, then also leaving the December 31 worksheet "to do later."
- Accruing interest payable and debiting Interest Expense for the same $600 a second time when you later record the bank's interest bill.
- Using Accounts Payable when the vendor is unknown or unbilled; a titled accrued liability (Salaries Payable, Interest Payable) is clearer and is what most CB-style items expect.
- Accruing an amount that is already in Accounts Payable from an invoice dated December 28. Read the unadjusted trial balance first.
The diagnostic question: Have we incurred it, and is it not yet in an expense account? If cash already created a prepaid, credit the prepaid. If nothing is recorded, credit a payable. If an invoice is already in Accounts Payable, do not accrue again.
Weekly payroll is $7,000 paid every Friday for a Monday–Friday workweek. Year-end is Wednesday. What is the year-end adjusting entry for the three days earned but unpaid?
On November 1 a company borrows $40,000 on a 9 percent note. Interest is due at maturity. Using a 360-day year, what is the December 31 adjusting entry after 60 days as the borrower?
On January 1 the firm paid $1,200 for January–June insurance and debited Prepaid Insurance. What is the correct January 31 entry for one month used?