Expenses incurred but not yet paid or recorded at the statement date are accrued expenses. Interest, rent, taxes, and salaries are typical accrued expenses. Accrued expenses result from the same causes as accrued revenues. In fact, an accrued expense on the books of one company is an accrued revenue to other company. For example, Pioneer’s $200 accrual of revenue is an accrued expense to the client that received the service.
An adjusting entry for accrued expenses serves two purpose: (1) It records the obligations that exist at the balance sheet date, and (2) it recognizes the expenses of the current accounting period. Prior to adjustment, both liabilities and expenses are understated.
An adjusting entry for accrued expenses increases (debits) an expense account and increases (credits) a liability account.