Interview Question: Difference between Accrued Expenses and Prepaid Expenses

Accrued expenses and prepaid expenses are important concepts in accounting that junior accountants should be familiar with.

Accrued Expenses:

Accrued expenses refer to expenses that have been incurred but not yet paid for. These expenses are recognized on the income statement when they are incurred, regardless of when they are paid. Examples of accrued expenses include wages, interest, and utilities.

Prepaid Expenses:

Prepaid expenses are payments made for expenses that will be incurred in the future. These expenses are initially recorded as assets on the balance sheet and are gradually expensed over time as they are used. Examples of prepaid expenses include rent, insurance, and subscriptions.

Understanding the difference between accrued expenses and prepaid expenses is crucial for accurate financial reporting and budgeting.