An accrued expense is an expense that a company has incurred during an accounting period but has not yet paid. In many cases, the related invoice has also not yet been received. The business recognizes both the expense and a corresponding liability before the cash payment occurs.

Accrued expenses are an important part of accrual accounting. Under U.S. Generally Accepted Accounting Principles (U.S. GAAP), accrual accounting recognizes financial effects in the periods in which the underlying transactions and other events occur rather than only when cash is received or paid.

For example, if a Florida-based company owes employees $10,000 for work performed in December but pays those wages in January, the company recognizes the applicable wage expense and liability in December.

Purpose of Accrued Expenses in Business and Accounting

Recording accrued expenses helps businesses:

1. Recognize Expenses in the Appropriate Period – Records costs based on when the underlying economic activity occurs rather than only when cash is paid.
2. Recognize Outstanding Liabilities – Includes obligations that exist at the reporting date even when payment will occur later.
3. Improve Financial Reporting – Helps prevent expenses and liabilities from being understated.
4. Support U.S. GAAP Reporting – Accruals are an important component of accrual-based financial statements.
5. Improve Financial Planning – Helps management identify obligations that will require future cash payments.
6. Support Period-End Closing – Accrued expense entries help ensure accounts are complete before financial statements are prepared.

Types of Accrued Expenses

1. Accrued Salaries and Wages

Accrued salaries and wages represent compensation employees have earned but have not yet been paid by the reporting date.

Example: Employees work during the final week of December, but their paychecks are issued in January. The company recognizes the applicable wage expense and liability in December.

2. Accrued Interest

Accrued interest represents interest expense that has accumulated on debt but has not yet been paid.

Example: A business loan accumulates $2,000 of interest during December, but the next interest payment is not due until January. The company recognizes the applicable interest expense and liability in December.

3. Accrued Utilities

Businesses may consume electricity, water, gas, or other utilities during one reporting period but receive the related bill in the following period.

Example: A company uses electricity throughout December but receives the utility bill in January. It may estimate and accrue the December utility expense before closing its books.

4. Accrued Taxes

Certain tax expenses or obligations may be recognized before the related amounts are paid to federal, state, or local tax authorities.

The appropriate accounting treatment depends on the type of tax, applicable accounting requirements, and the circumstances creating the obligation.

5. Accrued Professional Services

A company may receive legal, accounting, consulting, or other professional services before receiving the related invoice.

Example: An attorney provides services to a business during December but does not submit an invoice until January. The business may need to estimate and accrue the December expense.

How Accrued Expenses Work in Financial Reporting

1. Identifying Accrued Expenses

At the end of an accounting period, businesses review their activities and outstanding obligations to identify expenses that have been incurred but have not yet been fully recorded.

Common sources include payroll records, contracts, loan agreements, utility usage, professional services, taxes, and other recurring obligations.

2. Recording an Accrued Expense

Accrued expenses are commonly recognized through adjusting journal entries.

For example, if employees have earned $8,000 in wages that remain unpaid at year-end:

The entry recognizes the expense in the current period and establishes a liability for the amount the company owes.

3. Recording the Subsequent Payment

When the company later pays the accrued wages:

The payment reduces both the liability and the company's cash balance without recording the same wage expense a second time.

Some recurring accruals may also be reversed at the beginning of the following accounting period and replaced by the actual transaction when it is recorded.

Accrued Expenses vs. Accounts Payable

For example, electricity consumed in December before the utility bill is received may be recorded as an accrued expense. Once an invoice from a supplier is received and recorded, the obligation is commonly classified as accounts payable.

Advantages and Disadvantages of Accrued Expenses

Advantages

• Improves Financial Reporting: Recognizes obligations that exist at the reporting date.
• Prevents Liability Understatement: Includes unpaid costs even when an invoice has not yet been received.
• Improves Period Performance Measurement: Recognizes expenses in the appropriate reporting periods.
• Supports Financial Planning: Identifies obligations that may require future cash payments.

Disadvantages

• Requires Estimates: Some expenses must be estimated before the final invoice or amount is available.
• Increases Accounting Complexity: Businesses need adjusting entries and period-end reviews.
• Does Not Represent Current Cash Payments: Recording an accrued expense does not itself reduce cash.
• Requires Subsequent Review: Estimated amounts may need adjustment when actual invoices become available.

Related Terms

• Accrued Liabilities vs. Accounts Payable: Accrued liabilities often represent obligations recognized before an invoice is received, while accounts payable commonly represent recorded supplier or vendor invoices.
• Prepaid Expenses vs. Accrued Expenses: Prepaid expenses involve cash paid before the related expense is recognized, while accrued expenses are recognized before the related cash is paid.
• Accrued Expense vs. Accrued Revenue: Accrued expenses represent costs recognized before payment, while accrued revenue represents revenue recognized before the related cash is received.
• Adjusting Entries: Journal entries used to update account balances at the end of an accounting period.

Interesting Fact

Did you know? Accrued expenses may include wages, interest, rent, and taxes that have not yet been paid, meaning a business can recognize a liability even before the related cash leaves its bank account.

Statistic

For 2026, the IRS Section 448(c) gross-receipts threshold is $32 million, based generally on average annual gross receipts for the three preceding taxable years. The threshold is relevant to whether certain businesses meet the gross-receipts test associated with small business taxpayer rules.

Frequently Asked Questions (FAQ)

1. Why are accrued expenses important in accounting?

Accrued expenses help ensure that expenses and related liabilities are recognized in the appropriate reporting period even when payment occurs later. Without necessary accruals, financial statements may understate expenses and liabilities.

2. How do businesses record accrued expenses?

Businesses commonly record an adjusting journal entry that debits the appropriate expense account and credits an accrued liability. When the obligation is later paid, the liability is reduced and cash is credited.

3. Are accrued expenses required under U.S. GAAP?

Accrual accounting is fundamental to U.S. GAAP financial reporting. When applicable accounting requirements call for recognition of an expense and liability, the amount is recognized even if the related cash payment has not yet occurred.

4. What happens if a company does not record accrued expenses?

If a required material accrued expense is omitted, expenses and liabilities may be understated and net income may be overstated for the reporting period. The exact effect depends on the transaction involved.

5. How do accrued expenses affect cash flow?

Recording an accrued expense does not itself cause a cash outflow. Cash is affected when the obligation is eventually paid, which is why accrued expenses can increase liabilities before they affect the company's cash balance.