If a business only records expenses when cash comes and goes, that can be misleading. Accrual accounting, on the other hand, records income when you earn it and expenses when you’re billed, regardless of when cash changes hands.Ĭash accounting can be simpler, but bookkeeping using the accrual method can give you a more accurate picture of a company’s financial situation. Cash basis accounting documents income when it arrives and expenses as you pay them. Statement of Cash Flows for the Month Ended Īccrual accounting and cash basis accounting differ in terms of when each method records revenue and expenses. However, the accrued expense affects your statement of cash flows for March. Since you already recorded the wage expense back in February, the accrued expense doesn’t affect your income statement for March. net income - $1,500)Ĭurrent liabilitiesAccrued liability - wages $0 Now, on March 1, you pay the invoice for the owed wages from February for $1,500 with cash.Ĭash $6,500 ($5,000 from Jan. Here’s the effect of the accrued expense on the income statement: Since you’re planning to pay the wage next month, the accrued wage expense is a current liability - a debt that must be paid within 12 months. At this point, the accrued expense has no impact on the cash flow statement, because you won’t pay the bill until next month.Ĭurrent liabilitiesAccrued liability - wages $1,500 This is the effect of the accrued expense on your company’s balance sheet and income statement by the end of February. Let’s record the January wage expense on the day that you receive the bill by creating a wage expense account and an accrued liability account for those wages. The admin starts working in January, you get the first bill in February, and you pay it in March. Let’s assume you hire a part-time administrative assistant for one month that charges you $1,500 (including taxes) and sends you the bill on the first day of the next month. You keep track of accrued expenses by making two entries on the general ledger: one debit journal entry to show the expense and one credit journal entry to report the accrued expense as a liability. Think of it like a seesaw of debits and credits that must stay balanced at all times. One of the principal concepts of accounting is the concept of double-entry accounting, which requires two entries that offset each other. You need to record transactions involving accrued expenses in the general ledger - the company's master record of financial transactions - and on the company’s three financial statements: the balance sheet, income statement, and statement of cash flows.

Accrued expense