Accrued Expense

Accrued Expenses

Accrued expenses (accrued liabilities) are obligations a company records when expenses are incurred but before cash is paid. Under accrual accounting, expenses are matched to the period in which the related goods or services were received, providing a more accurate picture of financial performance than cash-basis accounting.

Key takeaways

• Accrued expenses are recorded when incurred, not when paid, and appear as current liabilities on the balance sheet.
• Accrual accounting gives a more complete view of financial position and performance than cash accounting, but requires more record‑keeping.
• Reversing entries are commonly used to avoid duplicate charges when the actual invoice or payment is recorded later.

Typical examples

• Employee wages, commissions, and bonuses earned but not yet paid
• Interest expense that has accrued on loans but is unpaid
• Utilities, taxes, or warranty costs incurred before invoice receipt
• Purchases of supplies where the invoice arrives after the period end

How accrued expenses are recorded

1. At period end, record an adjusting entry:
2. Debit the appropriate expense account
3. Credit an accrued liability (e.g., Accrued Payables or Salaries Payable)
4. When the invoice is received or cash is paid in the next period:
5. Debit the accrued liability to remove it
6. Credit cash (or accounts payable, if processed through AP)

Example journal entry to accrue a $10,000 utility cost in June:
* Debit Utility Expense $10,000
* Credit Accrued Payables $10,000

When paid in July:
* Debit Accrued Payables $10,000
* Credit Cash $10,000

Reversing entries

Accruals are generally temporary. A reversing entry in the following period removes the accrual so that when the actual invoice is posted it does not get double-counted. Many accounting systems can auto-generate reversing entries.

Accrual vs. cash basis accounting

• Accrual accounting: records economic events when they occur (more accurate and GAAP-compliant).
• Cash accounting: records transactions only when cash changes hands (simpler but can misstate period performance).

Accrued vs. prepaid expenses

• Accrued expense = liability for costs already incurred but unpaid.
• Prepaid expense = asset representing payment made in advance for future goods or services; expensed over time as the benefit is received.

Month-end and year-end considerations

• Accrued expenses are commonly booked during the close process to capture transactions not yet invoiced.
• Proper supporting documentation and review are important to reduce misstatements.
• Over- or under-accruals can distort period results; use estimates prudently and disclose significant accrual policies when required.

Pros and cons

Pros:
* Produces financial statements that better reflect operational activity and obligations
* Improves consistency across reporting periods
* Supports management decision-making and external reporting requirements

Cons:
* More time-consuming and resource-intensive than cash accounting
* Greater risk of errors or duplicate entries if reversals are mishandled
* Can obscure cash flow implications because non-cash liabilities are included

Practical illustration

If employees work in November but are paid in December, accrual accounting records November salary expense in November and a salaries payable liability on Nov. 30. When payment occurs in December, the payable is cleared and cash decreases—avoiding understatement of November expenses.

Conclusion

Accrued expenses ensure expenses are matched to the periods in which they are incurred, improving the relevance and comparability of financial statements. They require careful estimation, timely reversing entries, and disciplined month‑end procedures to maintain accuracy.