Accrued Expenses

Posting ‘Accrued Expenses’ is one of the tasks performed by accountants as part of the month-end closing.

Let’s understand what are accrued expenses.

In accrual basis of accounting, income and expenses are recognised when they are incurred. (Whereas in cash basis accounting, income and expenses are recognised when cash is paid or received.)

What if you consume electricity worth $500 in December 2023 but receive an invoice later, dated January 14, 2024? Should you post the purchase invoice in January with 14-Jan-2024 as the posting date, or should you post the purchase invoice with 31-Dec-2023 as the posting date?

Since we follow the accrual basis of accounting, we must book this $500 expense in December. But booking a purchase invoice in December may not be possible. For example, here in India, we must book this purchase invoice in January 2024, as the vendor would also report this in January 2024. Otherwise, there will be an invoice mismatch in the tax portal.

How do we book the $500 expense in December while booking the purchase invoice in January?

This is where journal entries for accrued expenses come into play. You can post a ‘Journal Entry’ debiting the expense ledger and crediting the ‘Accrued Expense Payable’ ledger on the last day of December. Once you book the purchase invoice later in January, you can reverse the original journal entry.

Now, are you thoroughly confused about why such a circus is needed? Don’t worry, you are not alone.

Accrued expenses require an understanding of the posting date, accounting period, and accrual accounting. Read this again and again. Focus on the question. Once you understand it, the answer becomes easy to understand.

Also, you may not know the exact value of electricity consumed in December and hence have to arrive at a number based on average consumption or other logic.