Accruals — earned or incurred first, cash later
Two more December 31 adjustments: employees earned $500 of wages in late December (payday is Jan 3), and the studio finished $800 of work in December that won't be billed until January. Prepare both accruals.
The journal entry
Dec 31: $500 of wages earned by employees, payday Jan 3
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | $500 | |
| Wages Payable | $500 |
- Wages Expense (debit): The work happened this year — matching puts the cost in this year, payday or not.
- Wages Payable (credit): A real liability on Dec 31.
Remember this
- formula
Accrual = income effect FIRST, cash LATER. Accrued expense: Dr Expense / Cr Payable. Accrued revenue: Dr Receivable / Cr Revenue. Later cash settles the payable/receivable — no second income hit.
- mnemonic
The four-type map: cash-first = deferrals (prepaid, unearned) · cash-later = accruals (accrued expense, accrued revenue). Every adjusting entry you'll ever see is one of the four.