A. ACCRUED EXPENSES (Payable)

…………………This is used to record expenses that are already incurred (used) by the business but not yet paid when the accounting period ends. If expenses will be paid at a future date, a liability account must be credited (Accrued Expense).

“in short po ito ay mga expenses na hindi mo pa nababayaran, kaya maliban sa Pagkakaroon ng expense nagkaroon din tau ng Utang or Liability, and that liability account should berecorded as “Accrued Expense” or Expense Payable” if and only if those expenses has not yet been recorded”

………………..“As what Expense Recognition Principle states, “all expenses should be recognized in the period these are incurred regardless whether paid or not”, its appropriate for us to make adjustments on the unrecorded expenses incurred at the end of the period to report all expenses incurred to produce the revenues during the accounting period.

….……………………………Pro-forma Adjusting Entries

……………….._______________ Expense……………..xx
………… ….........….Accrued _________ Expense…………….xx

…………To Illustrate:

………………The business is renting a space for 5000Php per month, payable every first day of the following month. The rental for the month of December was not paid when the accounting period ended on December 31, 2008. The business intends to pay the rental on January 1, 2009, the 1st day of the following month. The business accounting period ends every 31st of the year.

………….Analysis:
………………“Take note of the cut-off period (December 31, 2008)”

……………….“The Rent Expense should be recorded and reported in 2008, the period when the rent expense was incurred and not in 2009, the period where the rent expense will be paid.(with due respect to EXPENSE RECOGNITION PRINCIPLE).”

.....................“kung kelan sya nagamit dun din sya irerecord hindi ung kung kelan sya
babayaran, with due respect to our principles”

……………….“The adjusting entry should be prepared on December 31, 2008 to record the Rent Expense incurred and to recognize the corresponding Liability Account (Accrued Expense)

……………………………………....ADJUSTING ENTRY

…………………….Rent Expense……………………….5000
………………………..Accrued Rent Expense……………….5000

……….In the pro-forma adjusting entry, just fill in the blank of what account that have been accrued, so as if what have been accrued are-

1. Unpaid Salaries

…...................Salaries Expense…....…....……………....xx
……………………….Accrued Salaries Expense…………..xx

2. Unpaid Interest

......................Interest Expense………………...............xx
……………………….Accrued Interest Expense……………xx


Note: the accounts Accrued Rent Expense, Accrued Salaries Expense, Accrued Interest Expense, etc. are similar to Rent Payable, Salaries Payable, Interest Payable, etc. The term “accrued” when associated with an expense account connotes “payable” which means liability.


Effects of Error/Omission on Financial Statements

Income Statement- since Rental Expense has not been recorded, total expenses at the end of the period is understated. Deducting a smaller amount of expense that it should have been will overstate Net Income.

Balance Sheet- Since the liability will not be recognized, total liabilities reported in the Balance Sheet is understated. Owner’s Equity is overstated because the net income that’s is closed to capital is also overstated or better see the basic accounting Equation, A=L+P and assume any amount.



Financial Statements Presentation

.............Rent Expense, being a nominal account will be presented in the Income Statement Accrued Rent Expense, being a real account will be presented as a current liability in the liability section of the Balance Sheet.