Accrued Expenses: What They Are and How to Record Them
Every month, your income statement shows expenses based on when you used something — not necessarily when you paid for it. That's the core principle of accrual accounting, and accrued expenses are one of the most common examples of it in practice.
If you've ever wondered why your books show rent expense in January even though you paid February's rent in January, or why you owe wages to employees for work already done — that's an accrued expense. Understanding it is fundamental to accurate financial reporting.
What Is an Accrued Expense?
An accrued expense is an expense that has been incurred — you've received the benefit of the goods or services — but has not yet been invoiced or paid. It's a liability on your balance sheet because you owe something for it.
The key distinction is between when the expense is incurred (when you used the service or received the goods) and when it's paid (when cash leaves your account). Accrual accounting matches expenses to the period they relate to, regardless of when payment occurs.
Examples of accrued expenses: - Wages owed to employees for the last few days of the month (payroll is often processed on the 1st of the following month) - Interest on a loan that accrues daily but is paid monthly or quarterly - Utilities used in the current month but billed the following month - Professional fees for services received in the current period but not yet invoiced
Why Accrued Expenses Matter
Without accrued expenses, your financial statements misrepresent the true cost of doing business in a given period.
The problem in concrete terms: - Your business borrowed $100,000 on April 1 at 6% annual interest, paid annually on April 1 next year - By April 30, you've incurred ~$500 in interest expense - If you don't accrue it, your April income statement shows zero interest expense — even though you owe $500
The same principle applies to wages, utilities, and any other expense where the service period doesn't match the payment date.
Accrued expenses ensure your income statement reflects what actually happened in a period, not just when cash moved.
The Accrual Accounting Principle
Accrual accounting requires that: - Expenses are recorded when incurred (goods received or services performed), not when paid - Revenue is recorded when earned, not when cash is received
This is required under GAAP and IFRS for all but the smallest businesses. Even if you're a cash-basis taxpayer for tax purposes (which many small sole proprietors are), your books should still reflect accruals for accurate management reporting.
How to Record an Accrued Expense
Accrued expenses are recorded through adjusting entries — journal entries made at the end of an accounting period to ensure the books reflect the correct amounts.
The structure is always the same:
Debit the expense account (to recognize the cost in the current period) Credit the liability account (to record the amount you owe)
Example 1: Accrued Wages
Your pay period runs from the 25th of the month to the 10th of the following month. You pay employees on the 15th. At the end of March (March 31), employees have worked from March 25–31 but won't be paid until April 15.
Accrued wages journal entry (March 31):
Date: March 31, 2026
Account: Wages Expense Debit: $2,400
Account: Wages Payable Credit: $2,400
Description: Accrued wages for Mar 25-31 (paid Apr 15)
When you pay wages on April 15:
Date: April 15, 2026
Account: Wages Payable Debit: $2,400
Account: Wages Expense Debit: $[current period wages]
Account: Cash Credit: $[total paid]
Description: Payroll for Apr 1-15, including reversal of Mar accrual
Example 2: Accrued Interest
You borrowed $50,000 at 8% annual interest, interest paid quarterly. At the end of Q1 (March 31), you've used three months of borrowed money but won't pay interest until June 30.
Interest for Q1: $50,000 × 8% × (90/365) = $986.30
Accrued interest journal entry (March 31):
Date: March 31, 2026
Account: Interest Expense Debit: $986
Account: Interest Payable Credit: $986
Description: Accrued Q1 interest on term loan ($50K @ 8%, quarterly pay)
When interest is paid on June 30 (covering Q1 + Q2):
Date: June 30, 2026
Account: Interest Payable Debit: $986
Account: Interest Expense Debit: $1,012 [Q2 accrued]
Account: Cash Credit: $2,664 [Q1+Q2 total: $50K × 8% × (180/365)]
Description: Semi-annual interest payment on term loan
Example 3: Accrued Utilities
Your electricity bill for March usage arrives on April 5. You estimate $350 for the electricity you used in March.
Accrued utilities journal entry (March 31):
Date: March 31, 2026
Account: Utilities Expense Debit: $350
Account: Utilities Payable Credit: $350
Description: Accrued electricity expense, March usage (billed Apr 5)
When you receive and pay the bill in April:
Date: April 5, 2026
Account: Utilities Payable Debit: $350
Account: Cash Credit: $350
Description: Payment of March electricity bill
Reversing Entries
One common practice with accrued expenses is using reversing entries — optional journal entries made on the first day of the new period to automatically reverse the accrual, making the next payment entry simple.
Step 1 (end of prior period): Record the accrued expense
Dr: Utilities Expense $350
Cr: Utilities Payable $350
Step 2 (first day of new period — optional reversal):
Dr: Utilities Payable $350
Cr: Utilities Expense $350
Step 3 (when bill arrives and is paid):
Dr: Utilities Expense $350
Cr: Cash $350
The reversal means the April utilities expense shows only the actual bill amount, while the original March expense was correctly recorded in March.
Most modern accounting software handles this automatically through recurring journal entries and reversal options.
Common Accrued Expense Categories
| Category | What accrues | Typical timing |
|---|---|---|
| Wages / Salaries | Pay for work done before payroll run | Monthly or bi-weekly |
| Payroll taxes | Employer portion of CPP, EI, withholding | End of pay period |
| Interest | Loan interest accrued daily | Monthly or quarterly |
| Utilities | Electricity, gas, water used but not yet billed | End of month |
| Professional fees | Accounting, legal, consulting work | End of period |
| Rent | If rent period differs from payment date | Per lease terms |
| Commissions | Sales commissions earned but unpaid | End of month/quarter |
Common Mistakes With Accrued Expenses
| Mistake | Impact | Prevention |
|---|---|---|
| Not accruing at period end | Income statement understates expenses | Run an accrual review every month-end |
| Accruing too much | Income statement overstates expenses, creates overstated liability | Use actual bills where available; estimate conservatively |
| Forgetting to reverse | Double-counting in the next period | Use reversing entries or recurring journal templates |
| Accruing for the wrong period | Misstates two periods | Clearly label the period being accrued |
| Ignoring accruals for tax | Mismatches income and expenses on tax return | Work with a CPA on year-end adjustments |
How to Know What to Accrue
At each month-end, ask: - Have we received goods or services this month that we haven't been invoiced for? - Have employees worked days this month that won't be included in this month's payroll? - Is there interest that has accrued but not yet been paid?
A simple accruals checklist — covering wages, payroll taxes, interest, utilities, and any open service agreements — prevents most errors.
Accrued Expenses vs. Accounts Payable
Both are liabilities. The distinction:
- Accounts payable: You have been invoiced — there's a formal bill from a vendor
- Accrued expenses: You have not been invoiced — you're estimating based on the service period
In practice, some businesses don't distinguish between them and use a single "Accrued Liabilities" account. For clarity and audit readiness, separate accounts are better.
The Bottom Line
Accrued expenses are a fundamental part of accrual accounting. Every month, before closing your books, ask what you've received but haven't been billed for — and record it. The entry is always the same: debit the expense, credit the liability.
Done consistently, accrued expenses give you financial statements that accurately reflect what actually happened — not just when cash moved.
Draft prepared by CMO | 2026-04-08 For AccountingTitan Phase 2 content production — target: publish Wed Apr 23
