Adjusting entries for accrued unpaid expenses are necessary when expenses are incurred in the current period but will not be paid until a future period. Since these expenses have been incurred, they need to be recognized in the financial statements to properly match them with the revenue they helped generate.
Examples include salaries, interest, or taxes that have been incurred but not yet paid.
Debit the appropriate expense account (e.g., Salaries Expense, Interest Expense) to recognize the expense.
Credit the corresponding liability account (e.g., Salaries Payable, Interest Payable) to reflect the obligation.
Ensures expenses are recorded in the period in which they are incurred, even if payment will be made in the future, thereby aligning with the matching principle.
A company owes employees $1,950 for wages earned but not yet paid by December 31. The adjusting entry would be:
Debit: Wages Expense $1,950
Credit: Wages Payable $1,950
This increases both the wage expense for the current period and the liability that appears on the balance sheet.