Accrued Audit Fees Journal Entry
What Are Accrued Audit Fees?
When a company hires an external audit firm, such as a chartered accountant or auditing firm, to examine its books of accounts, financial statements, internal controls, and financial records, the company has to pay professional charges known as audit fees.
An audit helps a company verify the accuracy of its financial information and identify possible errors, accounting mistakes, irregularities, or fraud risks.
However, sometimes the audit work is completed before the company makes payment to the auditor. In such a situation, the unpaid audit fees become an obligation of the company. These unpaid charges are known as:
Accrued Audit Fees
Outstanding Audit Fees
Audit Fees Payable
In simple words, accrued audit fees are audit expenses that have already been incurred by the company but have not yet been paid to the audit firm.
According to the accrual accounting concept, expenses must be recorded in the accounting period in which they are incurred, regardless of when the actual payment is made.
Journal Entry for Accrued Audit Fees
When audit services have been received but payment has not yet been made, the company records the following journal entry:
| Account | Debit | Credit |
|---|---|---|
| Audit Fees Expense Account | XXX | |
| To Accrued Audit Fees Account | XXX |
(Being audit fees accrued for the current accounting period)
Explanation of the Entry:
Audit Fees Expense Account is debited because the company has incurred an expense for audit services received.
Accrued Audit Fees Account is credited because the company has created a liability to pay the audit firm in the future.
Example of Accrued Audit Fees Journal Entry
Suppose a company completes its annual audit on 31 December, and the auditor's fee is $5,000. The company will pay the amount next month.
The journal entry will be:
| Account | Debit | Credit |
|---|---|---|
| Audit Fees Expense Account | $5,000 | |
| To Accrued Audit Fees Account | $5,000 |
(Being audit fees payable to the audit firm recorded for the current year)
The expense will appear in the Income Statement, while the unpaid amount will appear as a Current Liability in the Balance Sheet.
Journal Entry When Accrued Audit Fees Are Paid
When the company later pays the outstanding audit fees to the audit firm, the liability is settled.
The journal entry will be:
| Account | Debit | Credit |
|---|---|---|
| Accrued Audit Fees Account | XXX | |
| To Cash/Bank Account | XXX |
(Being outstanding audit fees paid to the audit firm)
Explanation:
Accrued Audit Fees Account is debited because the liability is reduced.
Cash/Bank Account is credited because money is paid to the auditor.
Accounting Treatment of Accrued Audit Fees
Accrued audit fees are classified as:
Since the company owes this amount to the audit firm, it represents a short-term financial obligation.
Difference Between Audit Fees Expense and Accrued Audit Fees
| Audit Fees Expense | Accrued Audit Fees |
|---|---|
| Represents the cost of audit services received | Represents unpaid audit fees |
| Recorded in the Income Statement | Recorded as a Current Liability |
| Reduces company profit | Shows amount payable to auditor |
| Expense account | Liability account |
Why Is Recording Accrued Audit Fees Important?
Proper recording of accrued audit fees helps a company:
For companies following accounting standards such as GAAP or IFRS, recognizing expenses in the correct period is an essential part of reliable financial reporting.
Key Takeaway
Accrued Audit Fees are expenses related to audit services that have already been received but remain unpaid at the end of an accounting period.
The correct accounting treatment is:
When payment is made:
Recording accrued audit fees ensures that a company’s financial statements present a true and fair view of its expenses and liabilities.
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