Accrued Expense
An accrued expense is an accounting term that refers to an expense that is recognized on the books before it has been paid. The expense is recorded in the accounting period in which it is incurred. Accrual accounting is the generally accepted accounting practice's (GAAP) preferred accounting method.
Definition: Accrued expenses refer to expenses that have been recognized in the books before payment is made. These expenses are recorded in the accounting period in which they occur. Accrual accounting is the preferred accounting method under generally accepted accounting principles (GAAP).
Origin: The concept of accrued expenses originates from the accrual accounting principle, which became widely accepted and applied in the early 20th century. The purpose of accrual accounting is to more accurately reflect a company's financial position and performance.
Categories and Characteristics: Accrued expenses can be categorized into various types, including but not limited to: accrued wages, accrued interest, accrued taxes, and accrued rent. The main characteristic is that expenses are recognized before actual payment, which helps companies more accurately match revenues and expenses, providing a more truthful financial statement.
Specific Cases: 1. A company recognizes its December wages on December 31, but the actual payment is made on January 10 of the following year. This wage expense is listed as an accrued expense in the December financial statements. 2. A business recognizes accrued interest expenses at the end of the year, even though the actual payment date is in the first quarter of the next year. This interest expense is listed as an accrued expense in the financial statements for the current year.
Common Questions: 1. Why use accrued expenses? Accrued expenses help to more accurately reflect a company's financial position and performance. 2. What is the difference between accrued expenses and prepaid expenses? Accrued expenses are recognized when expenses are incurred but not yet paid, while prepaid expenses are recognized when expenses are paid but not yet incurred.
