Accrued Expenses

Accrued Expenses: Advantages and Disadvantages

What are accrued expenses?

Accrued expenses are expenses that have occurred but have not yet been paid. This means that the company has received the goods or services but has not yet received a bill. Bills for accrued expenses usually come at a specific time, for instance, an electricity bill. 

With accrued expenses, the expense is typically recorded during the accounting period when the transaction occurred rather than when the payment was sent. Companies record accrued expenses as current liabilities in their balance sheets. This means that the company has an obligation to pay the expense in the future. Accrued expense is an estimate because the company or entity has not yet received the bill. 

Generally accepted accounting principles (GAAP) prefer the accrual accounting method because it provides a more accurate picture of a company’s financial position and performance. 

By recording accrued expenses in the period in which they are incurred, accrual accounting matches expenses with revenues. This results in a more accurate net income figure and a more realistic view of the company’s financial health.   

Advantages and disadvantages of accrued expense records

Experts consider recording accrued expenses to be more accurate for financial statements. Recording accrued expenses also helps businesses plan their finances better. This way, businesses can enter expenses that are recurring and account for the expense even before it is due. 

However, recording accrued expenses is more time-consuming and requires more careful attention to detail. There are more chances of misstatements because accountants might end up recording an expense that has already been paid as accrued. Accrued expenses may also complicate things because it does not include cash and cash-related expenses. This can lead to differences between the bank account balance and the balance sheet.

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