What Is Accrued Expenses

217

What is accrued expenses? Accrued expenses are those liabilities which have not been paid or accounted for during an ongoing accounting period or a specified period of time; therefore, a business’ liability to pay for products and/or services which have already been sold for which bills have not been received. The concept of what is accrued expenses was developed by the U.S. Bureau of the Budget and Management in their seminal book, Managing the Budget: Creating and Measuring an Accrual of Funds.

Expenses are incurred when a financial obligation is incurred and the financial obligation is created because of an increase in the financial resources available for purchase. The term assets refers to those assets that will be used as collateral on a loan or equity. Liability, on the other hand, refers to the obligations that will be created if the loan goes into default. For example, if a manufacturing firm decides to expand its operation, it must first obtain additional capital or raise funds through some other means to fulfill its expansion needs.

A company can save costs on what is called an asset utilization transfer by applying certain principles of finance to reduce total expenses. First, it is important to determine whether the cost of the assets being transferred is a direct liability or an indirect one. Indirect liabilities refer to interest payments, lease payments, and taxes that are based on the amount of credit extended to the firm. Direct liens include property taxes, lottery payments, and utility bills.

If the costs of transferring assets are relatively small, then a percentage reduction of expenses can be achieved by making smaller credit requests. This will ensure that the largest portion of the funds, the charge to the credit account, will be realized during the earliest possible date. Another technique to apply is to transfer only a portion of the charge to the credit account. This can be done by choosing a lower line of credit and using the finance charges to repay the balance owed on the line of credit. Transferring only a portion of expenses, rather than transferring all expenses, ensures that the largest portion of the charges are realized upon the transfer of the credit account.

When determining what is accrued expenses, a business owner should also consider the present value of cash flows. Present value is the amount of money that is expected to be available to the business immediately after deducting expenses from estimated sales. The amount of current assets also determines what is accrued expenses because they represent an estimate of future profits. If a firm takes the average cost of capital and its expected profits over a period of one year, then the amount of what is accrued can be determined.

Most businesses encounter situations in which what is accrued expenses cannot be determined. For example, if a firm has incurred some expensive repairs within the last six months, but no payments have been received, the accumulated expenses must be estimated as to their actual cost. In this situation, what is accrued usually becomes deductible under tax law. Tax laws outline the manner in which expenses are deductible, and a business owner should always consult with a certified public accountant prior to making any final decisions. A certified public accountant will be able to assist a business owner with both tax law considerations and financial statements.

Business owners must keep careful records of what is charged for each expense. Retaining records help in the event that the original estimate is not revised to reflect the more accurate costs. A business owner should also keep track of what is being used as an operating expense. These expenses include food, lodging, telephone, internet, etc., and must be itemized. An example would be office supplies that are needed every day of the year, but which are not capitalized as an expense during the year.

What is Expired? Another important consideration for most businesses is what is expiring, or what is known as a grace period. This is defined as the period in which expenses must be claimed and deductible before taxes are due, and is normally six months in length.