Section 3 - Accrued Expenses Flashcards
The Simple Interest Formula for accrued interest expense is:
When answering a question that requires you to calculate interest, remember (FAIR FOY)
Face Amount x Interest Rate x Fraction Of Year
Please note, the Simple Interest Formula is the same for Accrued Interest Revenue and Accrued Interest Expense.
The general entry to record an accrued expense is:
[Various] Expense (DR)
[Various] Payable (CR)
Since the company has incurred the expense, there must be an increase in expenses on the books which is reflected with a debit to the expense account, and since the company has not yet paid, there must be an increase in a liability, which is reflected with a credit to the associated payable account.
A debit to an expense account has an increasing/decreasing effect?
The normal balance of an expense account is a debit. Anytime an increase needs to be shown in an expense account, there must be a debit.
A credit has the opposite effect and reduces the balance. Generally, expense accounts are credited when an expense amount has been reduced or at the end of the period then the temporary accounts (revenues and expenses) are being closed.
Accrued expenses might include:
- Interest - Interest Expense / Interest Payable
- Rent - Rent Expense / Rent Payable
- Commissions and Royalty - Commissions Expense / Commissions Payable
- Utility bills - Utilities Expense / Utilities Payable
- Salary and wages - Salaries Expense / Salaries Payable
- Property and other taxes - Property Taxes Expense / Property Taxes Payable
Accrued expenses are:
Expenses that have been incurred but not yet paid
If expenses are not accrued, assets would be overstated.
True or False
False.
Whether the entry for accrued expenses was recorded or omitted, assets are not affected.
Accrued revenue affects expenses, net income, and liabilities.
Insurance Expense appears on which Financial Statement?
Income Statement
Your company borrows $28,500 on a 6 month, 15% note on September 1st.
At year-end on December 31st, what is the adjusting journal entry to record the accrued interest expense?
When answering a question that requires you to calculate interest, remember (FAIR FOY)
(Face Amount x Interest Rate*) x Fraction Of Year
- Step 1. Multiply the Face amount (Principal) by the Interest rate to calculate Annual Interest* $28,500 * 15% = $4,275
- Step 2. Divide Annual Interest by 12 to calculate the monthly amount. $4,275/12 = $356.25
- Step 3. Multiply the monthly amount by the number of months of interest has accrued $356.25 x 4 (Sep 1st - Dec 31st) = $1,425
Adjusting Entry
Interest Expense (DR) $1,425
Interest Payable (CR) $1,425
Every adjusting entry for accrued expense credits an expense account, increasing expenses on the income statement.
True or False
False.
A credit to an expense account reduces the balance in the account. A debit increases an expense account.
A company pays its employees every Friday. This year, the company’s year ends on a Tuesday.
If the company fails to accrue salaries for the week, how will the financial statements be affected?
Balance SheetIncome Statement
Assets - No Effect Revenue - No Effect
Liabilities - Understated Expenses - Understated Net Income - Overstated
What effect do expenses have on the Income Statement?
Expenses are subtracted from net income in order to find the net income or (net loss), therefore, expenses have a decreasing effect.
**As a helpful tip, keep in mind, if an entry has an effect on Revenue, it will have the same effect on Net Income. However, if an entry has an effect on Expenses, it will have an inverse (opposite) effect on Net Income.
Your company has a 5-day workweek and pays employees every Friday. The pay period for 20x7 ends on Tuesday.
If, for the last week of the year, gross payroll is $55,000, what is the adjusting journal entry at year end?
- Step 1: Determine weekly payroll amount and divide by the days in work-week to find a daily rate. $55,000/5 = $11,000
- Step 2: Given in the problem, on which day did the period end? (If on a Tuesday, account for 2 days. If on a Thursday, account for 4 days.) The period ended on Tuesday (accrue for 2 days)
- Step 3: After finding the daily rate, multiply it by the day on which the period ends. $11,000 x 2 = $22,000
Adjusting Entry
Salaries Expense (DR) $22,000
Salaries Payable (CR) $22,000
Rent Payable is what type of account?
Liability
Your company borrows $30,000 on a 90-day, 9% note on November 1st.
At year-end on December 31st, what is the adjusting journal entry to record the accrued interest expense?
When answering a question that requires you to calculate interest, remember (FAIR FOY)
(Face Amount x Interest Rate*) x Fraction Of Year
- Step 1. Multiply the Face amount (Principal) by the Interest rate to calculate Annual Interest* $30,000 * 9% = $2,700
- Step 2. Divide Annual Interest by 12 to calculate the monthly amount. $2,700/12 = $225
- Step 3. Multiply the monthly amount by the number of months of interest has accrued $225 x 2 (Nov 1st - Dec 31st) = $450
Adjusting Entry
Interest Expense (DR) $450
Interest Payable (CR) $450
Failure to accrue expenses has the following effect:
Understates / Overstates / No effect
Assets
Liabilities
Revenue
Expenses
Net Income
Assets - No Effect
Liabilities - Understated
Revenue - No Effect
Expenses - Understated**
Net Income - Overstated**
**As a helpful tip, keep in mind, if an entry has an effect on Revenue, it will have the same effect on Net Income. However, if an entry has an effect on Expenses, it will have an inverse (opposite) effect on Net Income.
