What kind of journal entry should be made for expenses that have not yet been paid?

When expenses have been incurred but not yet paid, an accrual entry is necessary to accurately reflect the expense in the accounting records. Accrual accounting adheres to the matching principle, which states that expenses should be recognized in the same period as the revenues they help to generate, regardless of when the actual payment is made.

In this case, the accrual entry would involve debiting the relevant expense account to acknowledge that the expense has occurred and crediting a liability account (such as Accounts Payable) to recognize the obligation to pay in the future. This ensures that financial statements present a truthful picture of the company's financial position by showing both the expenses incurred and the corresponding liabilities.

In contrast, a prepaid expense involves costs that have been paid in advance for services or goods to be received in the future, and a deferred entry usually pertains to revenues that have been received but not yet earned. A cash outflow reflects actual payments made and does not account for unpaid expenses. Thus, making an accrual entry is essential for tracking obligations and maintaining accurate records in line with accrual accounting principles.