Accrued Expense

Question: The first adjustment listed is an accrued expense. “How Does an Organization Accumulate

and Organize the Information Necessary to Prepare Financial Statements? “, the word “accrue” was defined as

“to grow.” Thus, an accrued expense is one that increases gradually over time. As indicated previously, some

companies program their accounting systems to record such expenses as they are incurred. This accrual process

reduces the need for separate adjusting entries. Other companies make few, if any, accruals and update all

balances through numerous adjustments. The recording process for such expenses should be designed to meet

the informational needs of company officials. Some prefer to have updated balances readily available in the

ledger while others are inclined to wait for periodic financial reports to be issued. What are some typical accrued

expenses and what is the appropriate adjusting entry if they have not been previously recorded by the accounting


Answer: If a reporting company’s accounting system recognizes an expense as it grows, no adjustment is

necessary. The balances are recorded properly. They are ready to be included in financial statements. Thus,

when statements are prepared, the accountant only needs to search for accrued expenses that have not yet been


Numerous expenses do get slightly larger each day until paid, including salary, rent, insurance, utilities, interest,

advertising, income taxes, and the like. For example, on its December 31, 2008, balance sheet, the Hershey

Company reported accrued liabilities of approximately $504 million. In the notes to the financial statements,

this amount was explained as debts owed on that day for payroll, compensation and benefits, advertising and

promotion, and other accrued expenses.

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