Accrued Expenses
What is an Accrued Expense?
An accounting term that refers to an expense that is recognized on the books before it has been paid
What is Bad Debt?
Bad debt is the outstanding amount that is owed to the company by its customers but is unlikely to be collected. Companies create bad debt provisions in their accounts to factor in uncollectible payments.
What is a Prepaid Expense?
An account that represents the expenses paid in advance for future goods & services
When do you recognize Revenue?
On simple terms, as soon as service is rendered, or product is supplied revenue recognition happens
What is Deferred Revenue?
An account that represents the obligation for the business to deliver some amount of product or services because invoice was sent to customer or cash was received from customer in advance
What are typical expenses that can be accrued?
Utility Bills, Repair & Main. Bills, Interest Payments on loans, Taxes, Wages, Commissions, Bonuses, etc.
What methods can we use to write off bad debts?
1. Direct Write-off Method
2. Allowance Method
Which financial statement is Prepaid recorded on?
Balance Sheet
Which Financial Statement is Revenue recorded? What is the typical journal entry?
1. Income Statement
2. Dr: AR Cr: Revenue
Which Financial Statement is Deferred Revenue recorded? What is the journal entry?
1. Balance Sheet;
2. Dr: Cash/AR Cr: Deferred Revenue
How do we record an Accrued Expense on Property Tax?
Dr: Property Tax $$
Cr: Accrued Liability $$
Which write off method is GAAP compliant?
Allowance Method
How do you determine the monthly expense for a prepaid expense?
Take the total invoice amount and divide by number of months the coverage is for.
What is an Unbilled Revenue?
An account that represents the revenue on goods sold or services performed for which invoices have not yet been sent
Is Deferred Revenue an asset or a liability?
Liability (aka Unearned Revenue, Deferred Revenue, or Contract Liability)
Do the Accrued Expense Entries need to be reversed? Why?
It depends!
What percentage (%) method can be used under the Allowance Method?
1. Accounts Receivable Aging Method (%)
2. Percentage of Sales Method (%)
If we received an Insurance bill of $12k on 1/1 for the year, what would the journal entry(s) be for January?
Step 1: Dr: Prepaid $12k Cr: AP $12k;
Step 2: Dr: Insurance Exp $1k Cr: Prepaid $1k
Is Unbilled Revenue an asset or a liability?
Asset (aka Accrued Revenue, Unbilled Revenue, or Contract Asset)
What is the journal entry to record when the performance obligation is satisfied?
Dr: Deferred Revenue
Cr: Revenue
ABC Co. received a $10,000 invoice from their vendor, XYZ, for the supplies they ordered on 12/10 and received on 12/15. They ordered additional supplies on 12/20 for $5,000, which they received on 12/30 without the invoice. How much Supply Expense will be reflected on the Income Statement for December?
$15,000
ABC Co. utilizes the Percentage of Sales Method for Bad Debt write off. January 2024's Net Sales are $100k, expects 3% of net sales are not collectible based on the company's historical experience. What is the transaction journal for bad debt in January?
Dr: Bad Debt Expense $3k
Cr: Allowance for Doubtful Accounts $3k
If we received the annual insurance bill of $12k in February 2024, coverage period is for 1/1/2024 - 12/31/2024. How do we record the journal entry(s) on the February financial statements?
Step 1: Dr: Prepaid $12k Cr: AP $12k;
Step 2: Dr: Ins Exp $2k Cr: Prepaid $2k
What is the journal entry to record revenue that has NOT been invoiced?
Dr: Unbilled Revenue
Cr: Revenue
If we invoiced a customer for an annual service contract of $12k on 1/1/2024, service agreement is for 1/1/2024 - 12/31/2024. How do we record the journal entry(s) on the January financial statements?
Step 1: Dr: AR $12k Cr: Deferred Revenue $12k;
Step 2: Dr: Deferred Revenue $1k Cr: Revenue $1k