Accrued Expenses & Revenues: Definition & Examples

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  • 0:02 Accrued Expenses and…
  • 1:02 Types of Accrued…
  • 1:42 Examples
  • 3:27 Lesson Summary
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Lesson Transcript
Instructor
Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Expert Contributor
Steven Scalia

Steven completed a Graduate Degree is Chartered Accountancy at Concordia University. He has performed as Teacher's Assistant and Assistant Lecturer in University.

Accruals are a part of the accounting world for most businesses. In this lesson, you will learn about two important parts of the concept of accruals: accrued revenue and accrued expenses.

Accrued Expenses and Revenues Definition

Most of the time, when we think about accounting, we think about the cash-basis method of accounting where revenue is recorded when cash is received and expenses are recorded when bills are paid. This isn't the only method of accounting, and most certainly not the one most businesses use. Instead, they use the accrual method of accounting, where revenue is recorded when it is earned, regardless of when it is received, and expenses are recorded when they are incurred, regardless of when they are paid.

There are two key components of the accrual method of accounting. They are accrued revenues and accrued expenses. Accrued revenues are revenues that are earned in one accounting period, but cash is not received until another accounting period. Accrued expenses are expenses that have been incurred in one accounting period but won't be paid until another accounting period.

Would you like to learn more about accrued revenues and accrued expenses? Well, just follow me, and I will teach you a few more things that you may need to know.

Types of Accrued Expenses and Revenues

There are a few common types of accrued expenses and accrued revenues. Falling under the accrued expenses category are salaries payable and interest payable. Salaries payable are wages earned by employees in one accounting period but not paid until another accounting period. Interest payable is interest expense that has accumulated but not yet been paid.

The two most common forms of accrued revenues are interest revenue and accounts receivable. Interest revenue is income that's earned from investments made. Accounts receivable is money owed to a company for goods or services that have not been paid for yet.

Examples

It's easy to read definitions of what concepts are, but you can understand them better by relating them to practical examples. So, let's look at a few examples of both accrued expenses and accrued revenues.

Omega Manufacturing Company has 45 employees that are paid on a biweekly basis. The total payroll amount is $37,800. The two-week pay period ended on April 7th, but the accounting period ended on March 31st. How much of the salaries payable is considered an accrued expense on the quarterly financial statement?

First, let's look at the information that you have. Payroll is processed every two weeks in the amount of $37,800. In order to figure out how much is an accrued expense for the first quarter of the year, we'll need to divide the two-week payroll amount by 2. The total amount of accrued expense that will be reported for salaries payable is $18,900. Why did we divide by 2? We did that because only one week of the payroll was owed when the books closed for the quarter.

Let's look at another example.

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Additional Activities

A Business Case Study:

You are the new controller at ABC Auto Care Ltd. You enter the office on your first day to find the CFO waiting for you at your desk. "Hello Accountant, I have an urgent task for you. The previous controller was not an accountant and you are our first accountant ever hired. The previous controller left a note regarding certain items that might require Accrued Expenses & Revenues to be entered in the general ledger for our quarter-end financials. I do not have time to look at this, can you? We need this to be done as soon as possible since the auditors are coming next week."

You pick up the following list.

Item
1 The company pays its wages on the 14th and 28th days of every month. The month ends on the 30th day.
2 The company obtained a $10,000, 12-month loan at 6% annually on the first day of this month. Interest is only due at maturity.
3 The company sold goods to a customer on the final day of the month - The customer paid immediately.
4 The company has $5,000 in past-due receivables that is charged a 1% per month interest fee.
5 The company is expected to pay a bonus to the CEO next month. The bonus still needs to be approved by the board but the controller thinks it should go through.

Required: Identify which items on the list must be accrued according to GAAP and briefly provide an explanation that will be the memo to the accrual journal entry.

Solution:

ItemAccrual required?Memo
1Yes, Wages payableSalaries were earned by employees but not yet paid.
2Yes, Interest payableInterest charge was incurred but not yet paid.
3NoCash was received from the customer, no accrual required.
4Yes, Interest receivableInterest revenue is recognized through the passage of time but not yet paid.
5No The bonus has not yet been approved, so no entry required.

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