What is an accrued expense and how is it recorded?

• A. Expense incurred but not yet paid; Debit Expense, Credit Accounts Payable.
• B. Revenue earned but not yet paid; Debit Expense, Credit Revenue.
• C. Expense paid; Debit Cash, Credit Expense.
• D. Revenue earned and paid; Debit Expense, Credit Cash.

Answer: (A)

Accrued expenses are costs that are incurred in the current period but not yet paid. In accrual accounting, you recognize the expense when it is incurred, not when cash is exchanged. The proper recording is a debit to the expense account to reflect the cost, and a credit to a liability account (usually Accounts Payable or Accrued Liabilities) to show you owe that amount in the future. This sets up the obligation and matches the expense to the period it relates to. When the bill is paid later, you would debit the liability and credit Cash to settle the obligation.