Accrued expenses payable definition
/What are Accrued Expenses Payable?
Accrued expenses payable are those obligations that a business has incurred, for which no invoices have yet been received from suppliers. These accrued expenses can be quite common when suppliers routinely issue invoices several days after the end of a month.
Accounting for Accrued Expenses Payable
An accrued expense payable is recorded with a reversing journal entry, which (as the name implies) automatically reverses in the following reporting period. By recording the expense in this manner, a business accelerates expense recognition into the current reporting period.
Accrued expenses payable are not recognized in a business that operates under the cash basis of accounting, since these entities only recognize expenses when cash is paid to suppliers. The cash basis of accounting tends to delay the recognition of expenses into later reporting periods.
Presentation of Accrued Expenses Payable
Accrued expenses payables are considered to be short-term liabilities, and so appear under that classification in the balance sheet. In the unlikely event that they are associated with a transaction that will not be settled for more than one year, they would instead be classified on the balance sheet as long-term liabilities.
Accrued Expenses Best Practices
Accrued expenses payable may not be recorded if they are too small to have a material impact on the financial results of a business. Avoiding immaterial accrued expenses payable can significantly reduce the amount of work required to close the books, since the accounting will have to deal with fewer journal entries, as well as the documentation associated with each one. This is accomplished by having a formal company policy that sets a monetary threshold below which expenses are not to be accrued.
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Example of Accrued Expenses Payable
Here are several examples of accrued expenses payable:
Late services invoice. A janitorial firm provides cleaning services to a customer, but does not issue a monthly invoice to the customer before its controller closes the books for the month; accordingly, the controller accrues the expense in anticipation of receiving the invoice at a later date.
Late inventory invoice. Goods are received during the month and recorded in a company's receiving log, but no supplier invoice arrives by the end of the month; in this case, the controller estimates the amount of the invoice based on the quantity received, and records an accrued expense.
Unpaid wages. A company has employees who earn wages daily, but they are paid on a bi-weekly basis. At the end of the accounting period, the employees have worked for several days, but their paychecks won't be issued until the next pay cycle. The company still owes these wages for the days worked but not yet paid. In this case, the controller accrues the expense for the unpaid days.