Accrued Expenses

Running a small business? You already know how much timing matters. Bills don’t always arrive in the same reporting period that you use the goods or services, and wages can be incurred before payday.

Accrued expenses help you capture those costs as they happen so that your financial statements show a more accurate financial picture of your business’s financial health – not just what’s been paid.

What are accrued expenses?

Accrued expenses (sometimes called accrued liabilities) are the costs that your company has incurred for services received or goods already delivered, but that haven’t been paid yet. For accrual accounting, these expenses are recorded in the period the business incurs them – matching costs to the revenue they help generate. Think of them as short-term obligations you’ll settle with future cash payments.

Accounting-wise, an accrual adds an expense account to your income statement and a matching liability account to your balance sheet. The result: accurate financial statements that show your real financial obligations, not just the movement of cash.

Best examples of accrued expenses

• Labour costs: Salaries and wages earned but not yet paid, or sales commissions and bonuses earned this month and paid next month.
• Rent expense and utility expense: Month-end falls before the landlord’s invoice or the electricity bill arrives.
• Interest payments on loans: The interest expense builds daily even if the bank only debits it quarterly.
• Taxes and statutory charges: Things that accrue through the period before assessment.
• Professional fees: Or other services completed near the end of the month with the invoice to follow.

Accrual accounting vs cash basis accounting

The major difference is timing. With accrual accounting, you recognise revenue and costs when they are earned or incurred. But for cash basis accounting, you record money when a payment is made or received.

Cash basis might feel simpler on the surface, but it can blur reality – especially if you sell on credit or have big end-of-month swings. Accruals give you the most accurate picture of profitability and all your cash flow needs coming up, because they surface current liabilities you’ll soon have to fund.

Accrued expenses vs accounts payable vs prepaid expenses

All of the following are part of your accounting records for what actually happened in a specific period. The problem is that they’re easy to mix up:

• Accrued expenses: Cost is incurred as no invoice has been received yet. You estimate and record the liability.
• Accounts payable: Cost is incurred and you have the invoice – it sits in accounts payable until payment.
• Prepaid expenses: The opposite of an accrual. You pay upfront before the services are received (e.g. annual insurance). On the balance sheet, this is an asset you release to the expense account over time.

Where accrued expenses show up in your financial statements

• Income statement: The accrual increases the relevant expense account (e.g. rent expense, utility expense, interest expense), so profit reflects the expense incurred rather than the invoice date.
• Balance sheet: The same accrual creates accrued liabilities under current liabilities, which helps flag future cash payments you’ll need to make.
• Cash flow: No immediate movement, but disclosures and your payables schedule help you plan the cash required to settle those items next period.

The journal entry (and reversal)

Recording an accrual uses double-entry accounting. First, you debit the relevant expense account (i.e. recognise the cost). Then you credit an accrued expenses liability account (i.e. acknowledge you owe it).

When you later receive the invoice and payment is made, you reverse the accrual (debit the liability) and post the supplier invoice as usual. Accounting software like Reckon can automate accrual journal entry reversals on the first day of the next month, which reduces duplicates and keeps the income statement neat and tidy.

Tracking accrued expenses without the headache

You don’t need to be a CPA to stay on top of accruals – just get into an end-of-month rhythm:

• Catch cut-off items: Wages earned but unpaid, late-arriving supplier work, interest accrued on loans, utilities crossing month-end, taxes building up.
• Estimate well: Use contracts, timesheets, meter readings, bank calculations and prior-period trends. Make sure you document how you got there in your accounting records.
• Automate in your accounting software: Set recurring templates for regular accruals, set up auto-reversals and add checklists for tracking accrued expenses at the end of every month.
• Review for your next period: When the invoice lands, compare the estimate vs the actual and refine your approach. Do this consistently and your numbers will stay sharp – even when suppliers are slow with their invoices.

Why do accrued expenses matter?

First of all, clarity. You get clearer financial statements that match your costs with your activities, not bank timing. You also get more control with accrued expenses because you can see a bird’s eye view of your profitability, obligations, and more, which is helpful for cash flow planning.

With a disciplined end-of-month close, lenders and advisors should trust your figures because they accurately represent reality. Plus, if you move from cash basis accounting to accrual accounting, you’re already in good shape for bank covenants or external reporting.

In short, accruals help your business tell the truth about your goings-on and keep you ahead of future cash payments.

Take advantage of your accounting software to standardise accruals, and lean on your bookkeeper for tricky estimates that can be refined over time. There are so many resources out there if you’d like to go deeper – but start with a simple monthly checklist and you’ll soon see the benefits on your income statement, balance sheet and bank balance.

See related Terms:

Accrual vs Cash Accounting
What is an expense?
What is an operating expense?