Accrued Expenses Explainer
Accrued expenses are costs a business has incurred even though cash has not yet been paid and a supplier invoice may not have arrived. Common examples include wages earned near month-end, interest that has accumulated, utilities already consumed, and professional services already received. Under accrual accounting, the expense belongs in the period that received the benefit, while the unpaid amount is recorded as a liability.
Suppose employees earn $8,000 during the final four days of March but will be paid in April. A March adjusting entry records $8,000 of wage expense and an $8,000 accrued-wages liability. When payroll is processed, the liability is cleared and cash is reduced. Some systems reverse the accrual at the start of the next period so the ordinary payment entry does not count the expense twice.
Accruals improve comparisons between revenue and the costs required to generate it. Managers use closing checklists to identify services received, payroll earned, taxes due, interest accumulated, and other obligations missing from the payable ledger. Reliable accruals also improve budgets and cash forecasts because they reveal commitments that have already arisen even if the payment has not yet left the bank.
Because many accruals are estimates, weak assumptions can distort profit and liabilities. Teams should document the calculation, owner, source data, expected payment date, and reversal method. Large differences between estimates and final invoices deserve review. Accrued expenses are not a reserve for vague future costs; they should reflect an existing obligation tied to activity that occurred before the reporting date.
The cost is recognized when the business receives the benefit, not merely when payment occurs.
The unpaid amount appears as a liability until the invoice or payment clears it.
A period-end adjusting entry records the expense and liability that routine processing has not captured.
A carefully controlled reversal can prevent the later invoice or payroll entry from duplicating the expense.
Use contracts, time records, meter data, interest schedules, or recent invoices to support the amount.
Compare the estimate with the final bill and improve the method when differences are material.
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