While most expenses are prepaid, a few are paid after a service has been performed. This is the case of wages and salaries. Since the expense has not been paid but services have been received, an accrued expense and a liability have taken place. The adjusting entry requires a debit to an expense account and a credit to a liability account. Failure to do so will result in net income and owner's equity being overstated, and expenses and liabilities being understated.
Example:
At the end of the accounting period, it was verified that employee wages of $1,500 and management salaries of $4,000 were not paid.
Adjusting journal entry:
Employee wages $ 1,500
Management salaries 4,000
Accrued expense
$ 5,500
1)- Debit all revenue accounts, and credit Income Summary.
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