Adjusting Entries: Accrued Expenses - Video Tutorials & Practice Problems
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Accrued Expenses
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Adjusting Journal Entries: Accrued Expenses
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Alright. So now let's move on to a cruel adjusting entries. The first one for accrued expenses. So remember that these adjusting entries, they're gonna include deferrals, Krul's and depreciation. So now we're in the cruel section, we're gonna talk about accrued expenses here. So accrued expenses. This is pretty general. This could be a bunch of different things but these are when we in current expense before cash is paid. Okay, So remember an expense, we're receiving some benefit, right? We receive a benefit when we take an expense but we haven't paid for it yet. Right. So think about that pop quiz. Accrued expenses are a expenses, be liabilities, see assets or D revenues. So think about it. There's going to be an expense. There was an expense that we received the benefit for but we haven't paid the cash for yet. We don't we haven't made the outflow. So the key here, I know you might think that these are expenses but they're actually liabilities. I know this keyword expenses makes you think it's an expense and that's pretty much always the case. I'm gonna say 99% of the time. It's the case. Unless you see this word accrued in front of the expense that's going to be a cue that we're talking about a liability or if you see prepaid in front of the expense. That's a cue that we're talking about an asset. Okay so in accrued expense. This is the idea that we've received some sort of benefit but we haven't paid for it yet. Right, we have that liability to pay for that benefit we received. Okay. So let's see, there's two important dates when we're talking about recording accrued expenses, just like all our adjusting entries, there were two dates. Okay? But in this one you're gonna notice because the cash happens later. So the first thing that happens is the closing date happens, the p period ending date comes. Okay? So on the period ending date we have to note that the periods ending. So we have to take all expenses that were incurred during this period, right? And this goes back to that matching principle, right? When we talk about recognizing expenses, we have to match them to the revenues that we earned. So if we earned revenues during this period, we want to make sure that all the expenses during that period are also included. Okay. So let's think about how this, this will fit in and generally when we talk about accrued expenses, the most common one is an employee expense. Alright? We're gonna accrue the wages that we haven't paid them yet. So let's see how it happens here. The company's employee earns $100 per day and the last pay date was December 28 On December 31. The entry is Okay. So we're just gonna imagine a very simple example that there's a company that has one employee that works every day of the year. He works every day of the year and he earns $100 every day. Okay. So the last payday was on December 28, right? That means he worked on December 29th December 30 and December 31 and wasn't paid for it. Right? But he did, those dates did happen during this period, right? The period ended on december 31st and there were these three days that we still haven't paid him for december 29th 30th and 31st and he would have earned $100 per day. Right? There's $100 times the $100 times the three days Would be $300 that we owe to this employee from work. He did this period, right? Even though we're gonna pay him next year, once January comes along well in this period he earned $300, right? Even though he's not gonna get paid yet. So on the company's books, we're gonna have to take the expense, we have to take the wage expense for the employee Of $300. Right? To account for those three days that we didn't account for yet. Now that's gonna be the debit, right? We increase the expense $300, but we have to credit our accrued. Now, this could just go into a broad accrued expenses category, right? We could just have all our accrued expenses in one place, but I'm gonna call it a crude wage expense. Okay, so notice wage expense is an expense accrued wage expense is a liability, right? Because that keyword accrued tells us that this is related to an expense that we received. The benefit for the employee worked for us but we haven't paid for it yet. Right? That's the that accrued aspect. So we're going to credit that 300 to increase the liability by 300. Okay? So now we have this a cruel this $300 a cruel but we're gonna we're gonna eventually pay him, right? We're gonna pay that employee and when we do it's in the next period, so the payment of the accrued expense removes it from the books. Okay? So on January four the company paid its employee for the seven day pay period. Okay? So notice there's seven days that the employees getting paid for, right? So there's seven days of payment, meaning there's $100 a day, times seven days he worked Comes out to $700 is gonna be the paycheck to the employee, right? So we can expect that the company is gonna have a credit to cash of $700, right? So I'm gonna write that in first. This will be down here and this is indented already for the cash for it to be a credit, right? We know that there's gonna be uh let me a little bit over here. There's going to be a $700 uh credit to cash because that's what we're paying him. But now let's think about the debits. There's two debits in this case. The first debit is going to get rid of the liability, right? We no longer owe him that $300. We had accrued $300 on the books because we owed it to him from the previous period. But now we don't owe him that money anymore because we paid him in cash. So we're going to get rid of that liability accrued wage expense. Okay? And that liability was 300. So we're debuting it 300 to get rid of it. Right? There was a credit of 300. Now a debit of 300 it's gone. But this this doesn't balance yet. Right? There's another $400 somewhere that needs to be accounted for. Well what did that? $400 relate to? Think about it, that 1st $300 that was about last year, right? That was talking about December 29, 30 and 31st. But now we're talking about a seven day period. It also includes january 1st, 2nd, 3rd and 4th, right? These are days that the that the employee worked this period. Now we're in a new period, right? We're in the in the following year. So now we can do our wage expense, we can debit wage expense again And this basically is a new wage expense. Right? So if you think about it, we're in a new period that wage expense had been cleared out when we closed the books. And now we're building it up again for new wages that we're paying in the new year. Right? So this $300 that has to do with last year's And this 400 is current year wage expense. Right? Does that make sense? So we're getting rid of the liability from last year's because we paid him for those for those three days during this period, but we also paid him for days that he worked during this period, that $400. Okay? So that full payment of $700, 1 gets rid of the accrued liability, but it also includes payment for the current period wages. Alright, So let's go ahead and pause here and move on to the next video.
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Problem
Problem
Wait-2-Pay, Inc. has an employee that works every day of the year for $100 per day. W2P pays its employee once per month on the 25th of the month. The company is preparing its December 31 financial statements. The entry to adjust for accrued salary expense would include:
Accrued Expenses occur when we receive the benefits of an expense, but have not paid for the expense yet. The account titles for Accrued Expenses can be written two ways. As an example, let's use wages earned by an employee, but not paid yet. This account could be written as "Accrued Wage Expense" or "Wages Payable." Both are correct!