Glossary

Accrued expense

Definition

An accrued expense is a cost the business has incurred in a period but has not yet been invoiced for or paid, such as wages earned at month end, interest on a loan or utilities used. It is recorded with an adjusting entry that debits the expense and credits an accrued liability, so the period shows its full cost under the accrual basis.

How it works

Accruals are part of every month-end close. Without them, expenses land in the month the invoice arrives, profit swings from month to month and the balance sheet understates liabilities.

When the invoice arrives the accrual is cleared. Many teams post a reversal entry on the first day of the next period and then book the invoice normally, which avoids double counting. Accruals are estimates, so use the best information available and adjust when the actual amount is known.

Example: accruing December electricity

A workshop uses about 1,800 of electricity in December, but the bill arrives on 10 January. On 31 December it records the accrual below. In January, when the bill of 1,850 is posted, the accrual is cleared and the 50 difference goes to January's expense.

Example: accruing December electricity
Account	Debit	Credit
Utilities expense	1,800
Accrued expenses		1,800

Related terms

Accrual basis
Under the accrual basis, revenue is recorded when it is earned and expenses when they are incurred, whatever the date of payment. IFRS and US GAAP statements are prepared on this basis.
Adjusting entry
An adjusting entry is recorded at the end of a period to bring balances up to date, for example accrued expenses, prepaid amounts or depreciation. It makes the statements follow the accrual basis.
Prepaid expense
A prepaid expense is a payment made in advance for goods or services the business will receive in future periods, such as annual insurance or rent paid up front. It starts as an asset and is expensed as the period it covers passes.
Liabilities
Liabilities are present obligations of a business to transfer cash or other resources because of past events, such as supplier invoices, loans, taxes payable and customer advances. They have a credit normal balance.
Expenses
Expenses are decreases in economic benefits during a period, through outflows or used-up assets, that reduce equity other than distributions to owners. Examples are salaries, rent, depreciation and the cost of goods sold.

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FAQ

Questions about Accrued expense

Is an accrued expense a liability?

Yes. It is a current liability until the supplier invoice is recorded or the amount is paid.

What is the difference between an accrued expense and accounts payable?

Accounts payable are backed by a received invoice; accrued expenses are recorded before the invoice exists, often based on an estimate.

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