Accrued expenses are expenses that have occurred but are not yet recorded through the normal processing of transactions. Since these expenses are not yet in the accountant's general ledger, they will not appear on the financial statements unless an adjusting entry is entered prior to the preparation of the financial statements.
Here is an example. A company borrowed $200,000 on December 1. The agreement requires that the $200,000 be repaid on February 28 along with $6,000 of interest for the three months of December through February. As of December 31 the company will not have an invoice or payment for the interest that the company is incurring. (The reason is that all of the interest will be due on February 28.)
Without an adjusting entry to accrue the interest expense that the company has incurred in December, the company's financial statements as of December 31 will not be reporting the $2,000 of interest (one-third of the $6,000) that the company has incurred in December. In order for the financial statements to be correct on the accrual basis of accounting, the accountant needs to record an adjusting entry dated as of December 31. The adjusting entry will consist of a debit of $2,000 to Interest Expense (an income statement account) and a credit of $2,000 to Interest Payable (a balance sheet account).
