Expenditures made by a company (but not yet paid) are usually referred to as payable expenses. Payable expenses are classified as debt obligations that must be repaid on the balance sheet. Learning how to recognize and record debt expenses requires a strong understanding of the basic principles of accounting, but the process and practice are actually quite easy.
Step
Part 1 of 2: Knowing Which Expenditures Are Payable Expense
Step 1. Understand what an outstanding expense is
Payable expenses occur during the closing period of the book and there are unrecorded cash disbursements and unpaid debt obligations. For example, employee salaries that have been paid but not yet disbursed can be referred to as debt expense. The company handles payable expenses by adjusting the books in the general journal.
Step 2. Understand why recording expenses on an accrual basis is necessary
Accrual basis of financial accounting (by time or occurrence) states that income and expenses should be recorded when transactions occur and not when cash for those transactions is received or paid. The principle related to expenditure is called the matching principle.
- The matching principle states that accountants must record expenses when they occur and the expenses match or balance the incoming income.
- The implication of this principle is that there is no need to wait until cash is paid to record expenses. For example, a company has an expense in the form of salary which is paid bi-weekly in the amount of Rp.100,000,000.00, but the period of payment made is divided evenly into 2 parts between the 2 accounting periods. That is, part of the salary has been paid at the end of the current accounting period. The bookkeeping for expenses, which is half of the total salary to be paid (Rp50,000,000.00), must be recorded in the current accounting period, even though employee salaries are not recorded until the next accounting period.
Step 3. Determine the expenses that need to be recorded on an accrual basis
Based on this principle, expenses incurred but not yet paid need to be recorded on an accrual basis on the balance sheet. The following are payable expenses that are often found on the books:
- Salary payable
- Interest owed
- Tax payable
Part 2 of 2: Recording Accounts Payable
Step 1. Calculate the recorded accruals that have been distributed
Once the payable expense has been identified, the total amount must be calculated by allocating the portions of the total expenses that should be recorded in the current accounting period. After the calculation and sum of all the money has been determined, it is time to record the report into the general ledger.
According to the example above, 50% of the total salary is recorded because the payment of half the salary falls in the accounting period
Step 2. Make proper adjustment notes
Accrual accounting is done by adjusting the financial statements in the general ledger. Adjustments to financial statements occur in the closing period and affect the balance sheet (on liabilities to be paid) and income statement (on expenses).
- Adjustment of financial statements should be done in the following way: calculating the appropriate expenditure as a debit, then calculating the obligation to be paid as a credit. Keep in mind, debit means increasing the amount of expenses and credit means increasing the amount of liability.
- Using the previous example, the implementation is as follows, calculating expenses in the form of employee salaries of Rp. 50,000,000.00 as a debit, then calculating the liability expense of Rp. 50,000,000.00 as a credit. It is necessary to understand that expenses in the form of salaries are expenses only, then because these expenses have not been paid, then these expenses become the burden of debt obligations (payable salaries). Therefore, what actually becomes credit is the debt obligation itself.
- Bookkeeping adjustments need to be made, because by ignoring them the company will underestimate the meaning of liability and consider income as everything.
Step 3. Prepare a reversing entry for the next accounting period
Claims related to accrual recording will arrive on time and are processed in general business activities. Therefore, to avoid calculating expenses twice, the initial financial records need to be recorded in the reversing journal for the next accounting period.
Most computer programs for accounting make it easy for the user to set a reversal date for the adjusted books. Reversal of balance sheet for adjusted bookkeeping can also be done manually with reversing journal
Tips
- Accounting principles based on the accrual principle have the same working principle in various countries. However, each country has its own detailed process for recording outstanding debt and depends on each country's accounting standards. The United States of America has an accounting standard called the U. S. GAAP (Generally Accepted Accounting Standards) while globally used IFRS (International Financial Reporting Standards). In Indonesia itself has an accounting standard, namely INA GAAP or PSAK (Statement of Financial Accounting Standards) which is made using the U. S. GAAP and IFRS as the main sources. The examples listed above can be stated in accordance with accounting standards in Indonesia.
- Sometimes, accrued expenses are non-existent items, such as electricity and water bills, monthly insurance costs, or subscription fees. In recording accrual expenditures, it is best to consider the value of recording accruals with the time and effort required to calculate and record them. It is possible to ignore the recording of accruals if the time required to calculate the report is more important than the value of the accrual expenditure itself.
- To help process the recording of accruals more accurately, it's a good idea to provide the appropriate numbers in the liability section and the expense section. For example, suppose a company assigns a "2" to its liabilities and a "4" to its expenses. The company then assigns the number "40121" for employee salary expenses and the number "20121" for the unpaid salary expense. In simple terms, the number 4 is associated with expenses, the number "2" is associated with obligations, and "0121" is associated with salary. This can help reduce errors that can be made in the calculation process and in the reversing journal.
