Key Concepts
Based on the accrual basis of accounting, expenses are recorded when they are incurred — when the goods or services have been used — regardless of when cash is paid.
Expense payable arises when a business has used services but has not yet paid for them by the end of the financial period. The amount owed is recorded as an expense payable.
Expense payable is a current liability — the business owes payment that must be settled in the next financial period.
The account name follows the type of expense — [Specific Expense] payable (e.g., Salaries expense payable, Utilities expense payable, Rent expense payable).
Expense payable = used but not yet paid = current liability.
- Year-end (Adjustment): Dr [Expense] / Cr [Expense] payable
- If omitted: expense understated → profit overstated
- First day of next period (Reversal): Dr [Expense] payable / Cr [Expense]
Step-by-Step Approach
Step 1 — Year-end: Record the expense incurred and the amount payable
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 31 Dec | [Expense] (+ expense) | X | |
| [Expense] payable (+ current liability) | X |
Step 2 — Start of next financial period: Reverse the payable
Why reverse? The bill is paid this year, but the expense was already counted last year — so we cancel the payable to avoid counting it twice.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 1 Jan | [Expense] payable (− current liability) | X | |
| [Expense] (− expense) | X |
Effects If Adjustment Not Made
If the year-end adjustment (Step 1) is not made:
- Expense is understated → Profit is overstated (expense and profit move in opposite directions)
- [Expense] payable is not recorded → current liability is understated
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 31 Dec | Utilities expense (+ expense) | 600 | |
| Utilities expense payable (+ current liability) | 600 |
Why reverse? In 20X6 the business pays the December bill, but that $600 was already counted as expense in 20X5 — reversing the payable stops it being counted again.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X6 | |||
| 1 Jan | Utilities expense payable (− current liability) | 600 | |
| Utilities expense (− expense) | 600 |
Effects if Step 1 (Adjustment) is not made:
- Utilities expense understated by $600 → Profit overstated by $600
- Utilities expense payable (current liability) understated by $600
Statement of Financial Position (extract)
| $ | |
|---|---|
| Current liabilities | |
| Utilities expense payable | 600 |
Classifying expense payable as a current asset. Expense payable is a current liability — the business owes payment to an external party.
Forgetting to reverse the payable on the first day of the next period. The reversal must be dated the first day of the next financial period.
Getting the effect on profit backwards. If expense payable is not recorded, the expense is understated → profit is overstated (expense and profit move in opposite directions).