## 2.3. Accrual journal entries at month end and reversal during the following month

Let's continue with the example from the second method calculation and show how journal entries can be recorded. Again, each business is different and has different chart of accounts, so the journal entries below are for illustration purposes only.

Company ABC estimated the utility expenses accrual as of March 31 to be \$11,355. The following journal entry will be posted:

To accrue utility expenses at March 31:

 Date Account Titles Debit Credit March 31 Utility Expenses 11,355 Accrued Utilities 11,355

Usually during the following month, such accrual is reversed. The reversal takes place because the actual bills will be received and paid and posted as a reduction to cash and an increase in utility expenses. This paid amount will also include the 11 days from March. Thus, if the March 31 accrual is not reversed, the 11-day expenses would be posted twice (expenses will be overstated incorrectly):

To reverse utility expenses posted during March close:

 Date Account Titles Debit Credit April 1 Accrued Utilities 11,355 Utilities Expenses 11,355

When the actual utility bills for March-April of \$31,000 are received at the end of April, they are posted to accounts payable:

To record utility bills received in April:

 Date Account Titles Debit Credit April 26 Utilities Expenses 31,000 Accounts Payable 31,000

Finally, when the payment is processed (checks are issued to the utility companies), the following journal entry is posed:

To record a payment of utility bills received in April:

 Date Account Titles Debit Credit April 30 Accounts Payable 31,000 Cash 31,000

The result of the journal entries above is as follows:

• The utility expenses for March correctly included the 20 days of expenses paid (February-March bills) plus the 11 days accrued at March 31.
• The utility expenses for April will correctly include the 20 days of expenses paid (March-April), less the reversal of the 11 days accrued at March 31, plus the accrual of expenses for the 10 days from April 21 to April 30 (the accrual entry to be posted at April 30).

The example with utilities expenses can be applied to other expenses of similar nature that may need to be accrued for at month (quarter, year) end. Such other expenses may include cell phones, rent, wages, interest expense, etc. The calculation method may need to be adjusted for each type of expenses accordingly based on their nature.

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