 Welcome to the session. This is Professor Farhad and the session would look at accrued expenses. You can also call them accrued liability and you will see why in a moment. This topic is usually covered in financial accounting, introductory course, obviously covered on the CPA exam as a topic. As always, please connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance and tax lecture. This topic is covered in my financial accounting, but I do cover other courses. If you like my lectures, please like, share, put them in playlists. If they benefit you, it means they might benefit other people and please connect with me on Instagram. On my website, you'll have additional resources such as true, false, PowerPoint slides, multiple choice. If you're studying for your CPA, 2000 plus CPA questions, exercises which are quasi CPA simulation. So let's talk about accrued expenses. So what are accrued expenses? Well, here we go. I always like to give the students this example. Let's assume you paid your rent for January. Okay. And in January, you had to pay a thousand dollars. Therefore you debit, rent, expense, $1000 and you credit cash, $1000. That's for January. No problem. In February, guess what? You used all your money on partying. You don't have money anymore to pay your rent. What's going to happen is, in February, you're also going to have a rent expense. Your rent expense don't go away, although you don't have any money, but you don't have the money. So what do you credit if you don't have the money? Well, guess what? You are going to credit liability. That's related to the expense. We're going to call it rent payable, $1000. So now notice, in January, you have an expense. In February, you have an expense. In January, your expense is paid. In February, your expense is accrued, means you're going to, you are with now. So what is accrued expenses? Cost incurred that are both unpaid and unrecorded. Now you have to record them. You have to record the rent expense. Although you did not pay it, that doesn't mean you don't have an expense. So when we adjust for accrued expenses, here's what's going to happen. We're going to increase the expense and we're going to increase its related liability. So if we increase rent expense, we're going to increase rent liability. If we increase interest expense, we're going to increase interest payable. If we increase salaries expense, we're going to increase salaries payable. So we're going to increase an expense. We're going to debit an expense and credit a liability for the same amount. So this is the adjustment for accrued expenses. Now, we've been working with the stride balance throughout this course. For accrued expenses, you don't have anything to adjust here. So you are not adjusting an existent amount, an existent amount. Basically, when you adjust accrued expenses, you are adding an expense, you are adding to your expenses and adding to your liabilities, adding to your expenses and adding to your liabilities. That's what you're doing. So you are not adjusting an existing account. You might be adding to an existing expense or an existing liability or adding a new expense or a new liability. So let's take a look at this example. Fast forward pays its employees $70 per day or 350-day for a five-day workweek. Salaries are paid every two weeks on Friday. Fair enough, per week is 350 for every two weeks $700. On December 31st, this year happens to be on a Wednesday. Let's look at this. So this is the week of December 31st and this is Monday, Tuesday, Wednesday, Thursday, and Friday. So December 31st is right here, December 31st. The employees will be paid when they will be paid on Friday. However, they worked for three days, they worked for three days, which they were not paid for, which they were not paid for. So here's what's going to happen. Let's also assume, so this is the previous week, the previous week, they were paid on Friday. They were paid on Friday. So we're going to end the year right here. We're going to end the year on December 31st. So the employee, they were paid on Friday. They came back, they worked Monday, they worked Tuesday, and they worked Wednesday. So now what's going to happen is we owe them three days and for each day they earn $70. And here's what's going to happen. These employees will not be paid until, let me use a different color, every two weeks they'll get paid. These employees will not be paid until Monday, Tuesday, Wednesday, Thursday, and Friday, which is the payday. So those employees that they work all of this week, in all of this week, so this is week one, this is week two, will not be paid until Friday and this will be January the night, the date. So at December 31st, the company will have to say, well, we owe our employees three days worth of work, three days worth of work. What does it mean? If we owe them three days worth of work, $70, $70, $70, we have $210 of accrued expenses, which are salaries expenses, accrued salaries expenses. So let's go ahead and input this transaction. So let me clear this. So adjusting entries is to increase the liability, salaries, payable, and increase salaries expense for $210. So we're going to debit. Salaries expense, $210, salaries payable, $210. What is that $210 for? For that three days of $70 each. Now, eventually, well, let's first look at the adjusting entries. So now we have a liability, we credited salaries payable $210 and we increase our salaries expense $210. Now, our payable are properly stated because if we did not do this entry, our payable will be under reported by $210. Now, we did the entry. So they are properly reported and our expenses and our expenses would have been only would have been only been 1400, which is incorrect. Our expenses would have been under reported. As a result, our net income would have been over reported. As a result, our overall equity would have been over reported. So now everything is properly stated. Now, let's take a look at the future payment of an accrued expense. So accrued expenses at the end of one period result in cash payment and future period because you record the expense now, but you have to pay for it in the future. On December 31st, we accrued $210. It means we owe the employees $210. On January 9th, the next year, we're going to have the payday, the following entry will reduce the liability and pay the employees. So let's take a look at January the 9th. On January the 9th, we're going to pay $700 in cash for two weeks worth of work. Of the $700, $210 is to reduce the liability, to reduce the liability for Monday, Tuesday, and Wednesday, which are the 29th, the 30th, and the 31st of the prior year. Now we reduce that liability. So if we go back up here, let me go back to this entry here, this liability is gone since we paid it now. So this liability is gone. Then the employee work Thursday, Friday of that week, then they work Monday, Tuesday, Wednesday, Thursday, Friday for the following week. Therefore, they work in additional seven days. Let me put them in the front colors and those seven days are in the new year. Thursday, Friday, then they came back. They work Monday, Tuesday, Wednesday, Thursday, and Friday. So they earn seven days each day, $70. We have to expense $790. Therefore, the $700, $210 went to the payable and $490 went to the expense. Simply put, accrued expenses we have to pay them at a later date and this is the later date. This is the later date. In the next session, we would look at accrued revenues, accrued revenues. As always, I would like to remind you to like my videos. If you like them, please share them, put them in playlist and I strongly suggest you visit my website. If you're looking for additional resources, you're looking for that additional boost. If you're studying for your CPA exam, make an investment in your career. It's worth it. Accounting is challenging, but it paid off. It's worth it. Good luck and study.