Question

There are two different types of adjustments that accountants make at the end of the period, deferrals and accruals. There are deferred revenue, deferred expenses, accrued revenue and accrued expenses. Select one type, explain what it is, why we make the adjustment and give an example of the adjustment including the journal entry.  

Answer 1

Accrued expenses:- On the fundamental and basic principle of the accounting is ACCRUAL principle. It means that accounting is done on the accrual basis not on cash basis. Accrued expenses are those expenses which has been incurred by the entity during the current accounting year however, same has not been paid during this accounting year.

As per basic accounting principles such expenses has to be booked in the year in which it incurred irrespective of the fact that payment has been made or not during this financial year.

We make adjustment of accrued expenses to follow accrual basis of accounting and matching concept.

For example:

Salary expense per month in a company is $200,000. Salary is paid to employees in 5th day of next month for the last month worked.

Assuming company closes it's books on 31st december of every year. The salary of December month was paid in the next financial year on 5th day of january. Hence, adjustment entry to be passed on 31st december will be.

Salary expense	$200,000
Salary payable		$200,000