Glossary term
Accrued Expense
An accrued expense is a cost a business has incurred but has not yet paid or fully invoiced by the end of an accounting period.
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What Is an Accrued Expense?
An accrued expense is a cost a business has incurred but has not yet paid or fully invoiced by the end of an accounting period. It is recorded under accrual accounting so the expense appears in the period when the business actually used the goods, services, labor, interest, or other benefit.
Accrued expenses help prevent financial statements from looking too strong just because a bill has not arrived yet. They usually create an accrued liability on the balance sheet until payment or invoicing clears the obligation.
Key Takeaways
- An accrued expense is incurred before it is paid or sometimes before the invoice arrives.
- It helps match expenses to the period they belong in.
- Common examples include wages earned but not yet paid, interest owed, utilities used, bonuses, taxes, and professional fees.
- Accrued expenses usually appear with a related liability until they are paid.
- They are a normal part of accrual accounting, but estimates should be reviewed and reversed when the actual bill is recorded.
How Accrued Expenses Work
Suppose employees work the last week of December but are paid in January. The business has incurred payroll expense in December even though cash will not leave until January. Under accrual accounting, the company records the wage expense and a liability in December. When payroll is paid, the liability is reduced.
The same logic applies to interest, utilities, taxes, insurance adjustments, bonuses, rent, and services received before billing. The accounting entry makes the period's cost more complete.
Common Accrued Expense Examples
Expense | Why it may accrue |
|---|---|
Payroll | Employees earned wages before payday. |
Interest | Interest accumulated before the payment date. |
Utilities | Services were used before the bill arrived. |
Bonuses | Employees earned compensation tied to the period. |
Taxes | Tax obligations built up before payment. |
Accrued Expense Versus Accounts Payable
Accounts payable usually refers to vendor invoices that have been received and recorded. An accrued expense may exist before the invoice arrives or before the exact amount is known. Both can represent liabilities, but they usually arise at different points in the accounting process.
Once an invoice is received, an accrued expense may be reversed and replaced with accounts payable. That keeps the expense from being counted twice.
Why It Affects Financial Interpretation
Accrued expenses can materially change profit and liabilities. A business that skips accruals may overstate current earnings and understate obligations. A business that overestimates accruals may depress current earnings and create future reversals.
For readers, the key issue is whether the accruals are reasonable and consistently applied. Large changes in accrued expenses can signal growth, seasonality, delayed billing, cost pressure, or accounting estimate changes.
The Bottom Line
An accrued expense records a cost in the period it was incurred, even if cash or the invoice comes later. It is a core accrual-accounting tool for matching expenses with the activity that created them.