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#cfa-level-1 #reading-23-financial-reporting-mechanics

Accrued expenses arise when a company incurs expenses that have not yet been paid as of the end of an accounting period. Accrued expenses result in liabilities that usually require future cash payments. In the IAL illustration, the company had incurred wage expenses at month end, but the payment would not be made until after the end of the month (Transaction 11). To reflect the company’s position at the end of the month, the accounting treatment involved an originating entry to record wage expense and the corresponding liability for wages payable, and a future adjusting entry to eliminate the liability when cash is paid (not shown because wages will be paid only in February). Similarly, the IAL illustration included interest accrual on the company’s bank borrowing. (See the boxes showing the accounting treatment of Transaction 8, where Transaction 8 refers to the originating entry, and Transaction 8a, which refers to the adjusting entry.)

As with accrued revenues, accrued expenses specifically relate to end-of-period accruals. Accounts payable are similar to accrued expenses in that they involve a transaction that occurs now but the cash payment is made later. Accounts payable is also a liability but often relates to the receipt of inventory (or perhaps services) as opposed to recording an immediate expense. Accounts payable should be listed separately from other accrued expenses on the balance sheet because of their different nature

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(See the boxes showing the accounting treatment of Transaction 3, which refers to the originating entry, and Transaction 3a, which refers to the adjusting entry.) In other words, prepaid expenses are assets that will be subsequently expensed. <span>In practice, particularly in a valuation, one consideration is that prepaid assets typically have future value only as future operations transpire, unless they are refundable.<span><body><html>

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ved and the corresponding liability to deliver newsletters) and, subsequently, 12 future adjusting entries, the first one of which was illustrated as Transaction 12. Each adjusting entry reduces the liability and records revenue. <span>In practice, a large amount of unearned revenue may cause some concern about a company’s ability to deliver on this future commitment. Conversely, a positive aspect is that increases in unearned revenue are an indicator of future revenues. For example, a large liability on the balance sheet of an airline relates to cash received for future airline travel. Revenue will be recognized as the travel occurs, so an increase in this liability is an indicator of future increases in revenue. <span><body><html>


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