Chapter 5
The Accounting Cycle: Adjustments
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expense because the bill may not be received until later in the following month. Two examples of
this are electricity or water bills. An accrued expense will always increase a liability and increase an
expense account.
For accrued expenses, the end of the period will not report the correct amount of expenses on the
income statement without an adjustment. Also, since this expense represents an amount owed,
liabilities on the balance sheet will also be incorrectly stated. The adjusting entry for an accrued
expense will correct this. We will examine two examples of accrued expenses: salaries and interest.
Salaries Expense
Salaries to employees are paid after the work has been completed. If the work and the payment for
the work occur within the same period, no adjustment will have to be made. However, if the work
done by the employee occurs in a different period than the payment, an adjustment must be made
at the end of the period.
For example, suppose an employee is paid every two weeks. From the calendar in Figure 5.4, we
see the first pay period starts on September 12 and ends on September 23 when the employee
gets paid. Since the payment on September 23 is for work done in the same month, this will be a
transaction similar to what you have learned to pay salaries expense with cash.
The employee will then work the last week of September and the business will not pay until
October 7, which is the next pay date. The business accrues a salary expense for the employee for
the week worked in September. This expense must be recorded in September, even though the
employee will not be paid until October.
Sun
Mon Tue
Wed Thu Fri
Sat
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30
Sun
Mon Tue
Wed Thu Fri
Sat
1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30 31
September
October
2016
2016
Days worked but not paid
Start of pay period
Pay Date
Pay Date
____________
Figure 5.4
If the employee earns $1,000 every two weeks, they earn $100 per day ($1,000 ÷ 10 working days).
Thus, the business must create an adjusting entry for salaries expense for $500 ($100 per day × 5
days). Figure 5.5 illustrates the adjusting entry. Equity decreases, which is recorded as an expense.
