IGCSE Accounting for Accrued Expense
We will learn when a business records expense as incurred and when is expense considered as accrued. We will also learn how to adjust for accrued expense and record in the expense account and financial statements.
Related Lessons:
Determining Accrued Expense
Expense is regarded as incurred when the benefit has been used, regardless of whether payment is made.
Expense is regarded as owing or accrued when the service was used but payment was not made. Therefore, accrued expense payable is a current liability to the business.
To calculate accrued expense:
- Calculate total expense incurred for the accounting period.
- Determine the total amount paid for the accounting period.
- Amount incurred in excess of the total amount paid is regarded as accrued expense.
Adjusting for Accrued Expense Brought Forward
Expense owing in the previous accounting period is carried forward to the next accounting period for payment to be made. At this point, the amount is no longer treated as a current liability.
Therefore, the amount is transferred from the current liability account to the expense account so that the total expenses for the year are reduced, as this amount was not actually an expense of the current period.
This amount is recorded as “Balance brought down” on the credit side of the expense account.
Recording Accrued Expense
1. Accrued expense brought forward is recorded on the credit side as “Balance brought down”
2. Expense paid during the year increases our expense, and is therefore recorded on the debit side as Cash or Bank
3. Expense incurred for the current period is recorded on the credit side as Income Statement
4. Accrued expense for the current period is recorded on the debit side as “Balance carried down”
Recording in the Financial Statements
Amount transferred from the expense account to the Income Statement is recorded in the Income Statement as an Expense.
The amount of accrued expense at the end of the current accounting period is recorded in the Statement of financial position under Current Liability as Other Payables.