I am reading a book called “How to Read a Financial Report” by Tracy and this is what he writes about SG&A and Accrued Expenses Payable:
“To record such expenses as they accumulate over time a business uses a liability account called Accrued Expenses Payable and makes that following entry Income Statement: + SG&A Balance Sheet: - Accrued Expenses” I am confused because I don’t understand how increasing SG&A and REDUCING accrued expenses (which he says is a liability keeps the balance sheet in balance. Wouldn’t increasing SG&A flow down the income statement to net income and then to retained earnings on the balance sheet as a decrease in retained earnings that therefore reduces Shareholders’ Equity? And if you reduce accrued expenses payable which is a liability account, wouldn’t that make the balance sheet even less in balance since both retained earnings and accrued expenses are across from the asset side.
To me it makes sense to offset an increase in SG&A (and thus a decrease in SE) by INCREASING accrued expenses payable on the balance sheet. This would keep the balance sheet in balance because although Shareholder Equity will be decreased, liabilities (in the form of accrued expenses payable) will be increased and the net change on the balance sheet would be zero. Does this makes sense to anyone? I have been staring at this part of the book for half an hour and am utterly confused.