Hey everyone -
Let's assume that it's Q1'22 and a company expects to pay $10 in severance in Q3'22. Therefore, Q1'22 SG&A increases by $10, but accrued expenses also increase $10. If the company then realizes they only have to pay out $8, how would that flow through Q2'22 financials? What would offset the $2 decrease in accrued expenses?
Thanks
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Q1
Journal entry
SG&A $10
Accrued Liability $10
Q3
Journal entry
Accrued Liability $8
Cash $8
Adjusting entry
Accrued Liability $2
Retained Earnings $2
Edit: The adjusting entry can be made in Q2 instead of Q3 if they realize in Q2 severance will be less than initially accounted for.
Agree, but this entry would actually be a reversal (Company made a mistake). An accrued liability has already been incurred, so you know what the benefits are.
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