How to Record an Unpaid Expense in Accounting
Companies may receive goods and services and not pay the bills until after the current accounting period ends. Common unpaid expenses include credit purchases, such as raw materials; accrued expenses, such as the accrued interest on loans and bonds, and income taxes. A company must record these expenses in the same period in which they are incurred, even if it has not received an invoice or made any cash payments. If you are using the cash method of accounting, you would record cash transactions only, which means there is no need to record unpaid or accrued expenses.
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Instructions
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Record the purchase of goods and services on credit. Debit the appropriate expense account and credit the accounts payable account. For inventory purchases, debit inventory and credit accounts payable. For example, if a company places $1,000 worth of advertising on credit, it would debit advertising expense and credit accounts payable by $1,000 each. Companies may have up to 30 days to settle invoices and some suppliers may provide a discount to customers who settle their invoices early.
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Make the adjusting entries for accrued expenses. A company usually records transactions when it receives an invoice or a receipt for a cash payment. However, it must make adjusting entries for certain expenses that it settles in cash at specific time intervals or if it has not received an invoice. Examples of such invoices include sales, professional fees and accrued interest. In this case, debit the appropriate expense account and credit the corresponding payable account.
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Record accrued income taxes, which is the product of the corporate tax rate and the net income before taxes. Profitable companies accrue an income tax liability at year-end, even though the actual tax payment may occur in April, or over several installments during the year. Debit tax expense and credit taxes payable by the amount of the estimated income taxes.
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Record collected sales taxes. Companies often collect state and local taxes on merchandise sales but send the tax payments to the government later. Debit cash and credit taxes payable or sales taxes payable. When companies remit the taxes to the appropriate government tax authorities, they credit cash and debit taxes payable by the amount of the remittance.
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Tips & Warnings
Example of accrued interest expense: If a company has $1 million in bonds outstanding with a stated annual interest rate of 6 percent, the monthly interest accrual is $5,000 ($1 million x 0.06 / 12). Corporate bonds usually pay interest semiannually. At the end of a quarter, the accounting entries are to debit interest expense and credit interest payable by $15,000 each, which is equal to three months of accrued interest. When the company makes the semiannual interest payment, the accounting entries are to credit (decrease) cash and debit (decrease) accounts payable by $30,000 each, which is the accrued interest for six months.
