Accrued Expense and Income

Accrued Expense

Accrued expense is expense which has been incurred but not yet paid. Expense must be recorded in the accounting period in which it is incurred. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid.

As expense will be debited to record the accrued expense, a corresponding payable must be created to account for the credit side of the transaction. The accounting entry to record accrued expense will therefore be as follows:

Debit                            Expense (Income Statement)

Credit                           Expense Payable (Balance Sheet)

Example

ABC LTD pays loan interest for the month of December 2014 of $10,000 on 3rd January 2015. ABC LTD has an accounting year end of 31st December 2014. ABC LTD will recognize interest expense of $10,000 in the financial statements of year 2014 even though it was paid in the next accounting period as it relates to the current period. Following accounting entry will need to be recorded to account for the interest expense accrued:

Debit                            Interest Expense          $10,000

Credit                           Interest Payable           $10,000

On the date of payment of interest (i.e. 3rd January of the next year) following accounting entry will need to be recorded in the subsequent year:

Debit                            Interest Payable           $10,000

Credit                           Cash                            $10,000

Accrued Income

Accrued income is income which has been earned but not yet received. Income must be recorded in the accounting period in which it is earned. Therefore, accrued income must be recognized in the accounting period in which it arises rather than in the subsequent period in which it will be received.

As income will be credited to record the accrued income, a corresponding receivable must be created to account for the debit side of the transaction. The accounting entry to record accrued income will therefore be as follows:

Debit                                        Income Receivable (Balance Sheet)

Credit                                       Income (Income Statement)

Example

ABC LTD receives interest of $10,000 on bank deposit for the month of December 2014 on 3rd January 2015. ABC LTD has an accounting year end of 31st December 2014.

ABC LTD will recognize interest income of $10,000 in the financial statements of year 2014 even though it was received in the next accounting period as it relates to the current period. Following accounting entry will need to be recorded to account for the interest income accrued:

Debit                            Interest Income Receivable                  $10,000

Credit                           Interest on Bank Deposit (Income)      $10,000

On the date of receipt of interest (i.e. 3rd January of the next year) following accounting entry will need to be recorded in the subsequent year:

Debit                            Bank                                                    $10,000

Credit                           Interest Income Receivable                  $10,000