1. Explain why an accrued expense is calssified as a current liability?
2. Explain why the payment of an accrued expense in a subsequent period requires the payment to be split in the CPJ?
1. An accrued expense is an expense which is recognised following accrual accounting as having been incurred in a period, but not yet paid in that period. Hence the business has a present obligation to pay the expense, as a result of the past expense (event), the settlement of which will result in an outflow of cash (a resource embodying economic benefit) within the next 12 months (in the next reporting period), hence following the definition of a current liability.
2. As an accrued expense is the liability related to an expense incurred in a past period, it is necessary to split any payments of an expense into discharging of the liability and an incurrence of the same expense in the current period, to ensure expenses in the current period are not overstated (ensuring more accurate net profit), while ensuring liabilities are not overstated by discharging the liability. As a rule, the accrued expense is always paid before any new expense is paid and consumed in the current period. It is thus necessary to split any payments related to accrued expense into discharging of the liability and incurrence of expense in the CPJ to ensure accounting records and reports are accurate, and reflect the business's actual performance and transactions.