Accrued expenses journal entry, with examples

The entry, and the one that has to follow it

A contractor finished work on December 22. The invoice for $2,000 arrives on January 8.

The work happened in December, so the cost belongs in December, whatever the invoice says on top of it.

Date	Account	Debit	Credit
Dec 31	Subcontractor expense	2,000.00
Dec 31	Accrued liabilities		2,000.00

That is the entry everybody writes. Here is the one that decides whether December’s books are right in April:

Date	Account	Debit	Credit
Jan 1	Accrued liabilities	2,000.00
Jan 1	Subcontractor expense		2,000.00

The reversal undoes the accrual on the first day of the new period. Then on January 8 the bill arrives and gets entered normally, as a bill, debiting subcontractor expense and crediting accounts payable, by whoever does the data entry, without them needing to know an accrual ever existed.

That last clause is the entire point of reversing. The alternative is that the person entering January’s bills has to remember which ones were accrued in December and code those to the liability account instead of to the expense. They will not remember. Nobody does. The bill gets coded to subcontractor expense the way every other bill is, the December accrual is still sitting there, and the $2,000 has now been expensed twice: once in December and once in January.

What that double count looks like when you find it later

It does not look like an error. It looks like a business with a mysterious permanent balance in accrued liabilities that never goes down.

The accrued liabilities account is the tell. Pull it up as a general ledger report for the year. In a file where accruals reverse properly it is a sawtooth: a balance appears on the last day of a month, disappears on the first day of the next, repeat. In a file where they do not reverse it climbs, month after month, and every step up is one expense that was recorded twice and one month’s profit that was understated.

I have found four figures of that in files where nobody had done anything careless. Someone competent posted an accrual, the bill arrived, the bill got entered correctly, and no step in the chain was wrong on its own.

Accrued, not prepaid, and the direction that tells them apart

The two get mixed up constantly because both are timing adjustments with a balance sheet account in the middle.

An accrual is consume now, pay later. The expense goes up and a liability goes up alongside it, because you owe somebody.

A prepaid is pay now, consume later. Cash goes out and an asset goes up, because you are owed something.

If you are unsure which one you have, ask whether the money has left yet. If it has, and the benefit has not been used, it is a prepaid. If the benefit has been used and the money has not left, it is an accrual.

The five accruals a small file actually needs

Most businesses do not need an elaborate accrual process. They need the same handful every month.

Wages earned but not yet paid. A pay period running December 28 to January 8, paid January 15, has four working days in December. Debit wages expense, credit accrued payroll, for the four days.

Interest on a loan. The bank charges interest daily and bills it monthly, so at any month end there is interest incurred and not yet charged. Debit interest expense, credit accrued interest.

Utilities and phone. Billed in arrears, always. December’s electricity shows up on a January statement.

Subcontractors and professional fees. Work delivered in the period, invoiced whenever the other party gets around to it. This is the biggest one for most service businesses, and the one most likely to be material.

Sales tax and payroll taxes collected but not yet remitted. These are not really accruals in the adjusting sense, they are liabilities that arise automatically, but they end up in the same conversation. If your file has them sitting in an expense account rather than a liability account, that is a different problem and a bigger one.

An accrual is worth posting when leaving it out would change what the statements say. A $60 phone bill in a business doing $40,000 a month is not changing anybody’s decision. Posting it anyway costs time every month and buys nothing. Materiality is a judgement, and it is allowed to be one.

Doing this in QuickBooks Online without making a mess

QuickBooks Online has no accrual feature. There is no button. You write the entry yourself under + New and then Journal entry, and there are three things to get right.

Use a liability account that exists for this and nothing else. Call it Accrued liabilities or Accrued expenses. Do not credit accounts payable, ever, because accounts payable belongs to the bills sub-ledger and a journal entry against it puts a balance there that no bill explains, which makes the aging report disagree with the balance sheet.

Reverse it as soon as you save it. Open the saved journal entry and select Reverse. QuickBooks Online creates the mirror image dated the first day of the next month, with the same number and an R on the end. Nothing does this automatically, so make it part of the same sitting as the accrual: post, reverse, move on. Leaving the reversal for January is how it gets skipped.

Date it to the last day of the period, not to the day you are typing. If you are closing December on January 14, the accrual is dated December 31.

When the bill turns out to be a different number

It usually is. You accrue $2,000 for the contractor and the invoice comes in at $2,150.

If the accrual reversed, there is nothing to do. The reversal took out $2,000 in January, the bill put in $2,150, and the net effect in January is $150 of expense, which is exactly the amount by which December was understated. The books are right as of the point the bill was entered and no correcting entry is needed. This is the second reason to reverse and it is the one that saves the most time in practice.

If the accrual did not reverse, you now have to work out which part of the $2,150 relieves the liability and which part is new expense, by hand, for every accrual you posted. That is an afternoon, every month, forever.

Where this goes wrong in a file you inherit

Three patterns, in rough order of how often they turn up.

Accruals posted and never reversed, which is the sawtooth that climbs. Accruals posted to accounts payable instead of to a liability account, which breaks the vendor aging and produces a balance the client insists they already paid. And accruals posted in the first year a file was on the accrual basis and abandoned quietly in the second, so the comparative statements compare an accrual year against a cash year and the year-over-year movement is fiction.

Unpicking those means reading the accrued liabilities account from the date the file was opened and matching every debit to its credit, which is cleanup work, scoped by how far back it runs:

$99per month of backlog20% off 6+ months

Once it is clean, accruals are one of the standing steps in a monthly close, posted before the statements go out rather than remembered afterwards. The journal entry reference has the rest of the entries a close needs, including depreciation and deferred revenue. If your accrued liabilities account has been climbing and you want to know how far back it goes, send the file for a free review.