1. Introduction to Accounting Preparing for a User’s Perspective
Accrued Expenses: Cash is paid AFTER expense is recognized
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store

2. Matching Principle Rent Revenues Sales Revenues Interest Income
Recognize expenses in the same accounting period as the revenues that they helped generate.
Rent Revenues
Sales Revenues
Interest Income
Insurance Premiums
Consulting Revenues
Cash Out = Create Assets
Cash Out = Pay off Liabilities
Cost of Goods Sold
Salary Expense
Maintenance Fees
Wages Expense
Depreciation Expense
Travel Expense
Interest Expense
Utilities Expense
Claims incurred
Advertising Expense
Meals & Entertainment Expense

3. Three Common Matching Principle Situations
12/31/X1
12/31/X2
12/31/X3
Easy NO adjustments needed.
1) Cash is paid at the SAME time as the benefit received.
2) Cash is paid BEFORE the benefit is received
Yes, adjustments needed.
Deferred expenses
and the expense is recognized.
Yes, adjustments needed.
3) Cash is paid AFTER the benefit is received
Accrued expenses
and the expense is recognized.
Matching principle: AMOUNT $ and TIMING of EXPENSES

4. Deferred Expenses vs Accrued Expenses
DEFERRED EXPENSES: To “defer” means to put off until later; therefore, “deferred” expenses are expenses whose recognition is put off into the future even though payment has been made now.
Pay cash NOW
Deferred expenses
Recognize expense
LATER
ACCRUED EXPENSES: To “accrue” means to grow or to accumulate over time. In accrual accounting, if the matching principle criteria are met in the current period, expenses will need to be “accrued” into the current accounting period even if cash will not be paid out until a later accounting period.
Recognize expense
NOW
Accrued expenses
Pay cash Later

5. 2) Cash is paid AFTER the expense is recognized.
Example: On 5/1/X1 Borrower borrowed $10,000 from Lender Co. for 12 months at 12% simple interest. All interest and the principal are to be paid on 4/30/X2. Per accrual accounting, record all required entries for Borrower Co. on 5/1/X1, 12/31/X1 and 4/30/X2.
Principal $10,000
* Rate = 12% * Time = 12/12
= $1,200 per year
FTYE 12/31/X1
FTYE 12/31/X2
$1,200 per year / 12 months = $100 per month
5/1
4/30
Per the matching principle WHEN should the interest expense be recognized?
8 months
P =$10,000 * r = % * t = (8/12)
$800
4 months
P =$10,000 * r = % * t = (4/12)
$400
= $1,200

6. 2) Cash is paid AFTER the expense is recognized.
FTYE 12/31/X1
FTYE 12/31/X2
5/1/X1
4/30/X2
Cash $10,000
Interest Expense $400
Note Payable $10,000
Interest Payable $800
12/31/X1
Notes Payable $10,000
Interest Expense $ 800
Cash $11,200
Interest Payable $800
Interest Payable
800
12/31/X1
800
12/31/X1
4/30/X2
800 $0
12/31/X2

7. 2) Cash is paid AFTER the expense is recognized.
FTYE 12/31/X1
FTYE 12/31/X2
Interest Expense $800
Interest Expense $400
5/1
4/30
8 months
$800
4 months $400
= $1,200
Do our recognized expenses comply with the matching principle?
YES

8. 2) Cash is paid AFTER the expense is recognized.
Example: On 12/1/X5 New Co. signed a contract to receive $9,000 of consulting services from Consultant A over the three month period ending 2/28/X6. Assuming the services were provided evenly and New Co. paid for them on 2/28/X6, record all of New Co.’s required entries AND adjusting entries for 20X5 and 20X6 to comply with the matching principle.
FTYE 12/31/X5
FTYE 12/31/X6
$9,000/3 months = $3,000 per month
12/1
2/28
$3,000 of Consulting Expense Recognized BUT NO Cash Paid
$6,000 of Consulting Expense Recognized
AND $9,000 of Cash Paid
Per the matching principle,
WHEN should New Co. recognize the consulting expense?

9. 2) Cash is paid AFTER the expense is recognized.
FTYE 12/31/X5
FTYE 12/31/X6
12/1/X5
2/28/X6
No entry needed.
Consulting Expense $6,000
Accrued Expense $3,000
12/31/X5
Cash $9,000
Consulting Expense $3,000
Accrued Expenses $3,000
Accrued Expenses
3,000
12/31/X5
3,000
12/31/X5
2/28/X6
3,000
12/31/X6

10. YES 2) Cash is paid AFTER the expense is recognized. FTYE 12/31/X5
12/1
2/28
$3,000 of Consulting Expense Recognized BUT NO Cash Paid
$6,000 of Consulting Expense Recognized
AND $9,000 of Cash Paid
Did New Co. properly comply with the matching principle and accrue the expenses into the correct periods?
YES

11. Accrued Expenses: Expense recognition key points
1) Only recognize expenses in the accounting period in which the benefit is received, which should match the related revenue.
2) If you receive and use up a service that you haven’t yet paid for, you will need to accrue and recognize the expense now and pay the liability off later.
Accrued expenses
Balance Sheet Assets:
Liabilities:
Unearned Revenue
Equity
At year end, review all accrued expense account balances to determine if they are properly stated and adjust accordingly.
Income Statement Revenues Expenses
Net Income
4) At year end, review your expense accounts to ensure you have accrued all appropriate expenses whether cash has been paid or not.

12. Introduction to Accounting Preparing for a User’s Perspective
Accrued Expenses: Cash is paid AFTER expense is recognized
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store