Accrued Expenses That Are Recorded at a Realizable Value

Accrued expenses represent a part of the cost of doing business.

The term “net realizable value” is used to refer to accounts such as inventory or accounts receivable. This value represents an amount to be earned or collected, reduced by related costs. Accrued expenses are recorded as they are incurred or owed, reducing related revenues of the period. They represent the costs of earning revenue, not an item of value that is earned or collected. Examples of accrued expenses include cost of goods sold, depreciation and interest expense.

Cost of Goods Sold

One of the most visible accrued expenses of the accounting period is cost of goods sold. This account is a combination of accrued costs of direct materials, direct labor and manufacturing overhead incurred to produce the inventory sold in the period. To record the accrual, an adjusting entry is recorded at the end of the month to account for the cost of sales incurred on the month’s sales by debiting cost of goods sold and crediting finished goods inventory.

Depreciation Expense

A variety of fixed assets are used in the entity’s operations during the accounting period. As these assets are used during the period, a proportionate expense is incurred due to their use. The accrued expense can be calculated in a number of ways, depending on the nature of the asset and its use. To record the accrual, an adjusting entry can be recorded at the end of the month to account for the asset’s use by debiting depreciation expense and crediting accumulated depreciation. Accumulated depreciation reduces the fixed asset’s recorded cost to its book value.

Interest Expense

For the entity’s debt obligations, interest may be incurred due to the passage of time on the balances owed. Interest represents the cost incurred on balances that are outstanding and paid over time rather than up front. To calculate the accrual of interest for a month, multiply the debt’s interest rate by the balance outstanding and multiply by the time period of one month. Record the accrual by debiting interest expense and crediting interest payable.

Accrued Expenses on the Income Statement

Most accrued expenses are reported on the year-end income statement. The cost of goods sold amount for the year reduces gross revenues to arrive at total gross profit for the period. The total depreciation expense, representing the cumulative cost of the asset’s use in the accounting period, is reported as an operating expense. Total interest expense for the period is also an operating expense that reduces income for the period.

References

• Accounting Coach: What Is Net Realizable Value?
• Accounting Coach: What Are Accrued Expenses and When Are They Recorded?
• CliffsNotes: Accrued Expenses