If you incur an expense prior to the period in which the cash is paid, a liability is created at that time. For example, if employees earn $1,000 in January but are not paid until February, the entity has an expense of $1,000 in January and a liability, Accrued Salaries, at the end of January. In February, when employees are paid, there is a $1,000 credit to Cash and a $1,000 debit to Accrued Salaries. The debit part of the entry cancels the liability. The entries are as follows:
|
Dr. Salaries Expense |
1,000 |
|
|
Cr. Accrued Salaries |
1,000 |
|
Dr: Accrued Salaries |
1,000 |
|
|
Cr: Cash |
1,000 |