July 11, 2025

Accrued expense journal entry: What it is and how to record it

At times, expenses hit your books before the invoice ever does. Whether it’s utilities, software, or contractor fees, you still need to record the cost to keep your reporting accurate.

Accrued expense journal entries help you match costs to the period when you incurred them, helping you stay GAAP-compliant and maintain a clear view of your company’s financial position.

In this guide, you’ll learn what accrued expenses are, how to record them, and why they matter, especially at month-end. Ready to streamline your close process? Let’s take a closer look at the journal entries that make it possible.

What are accrued expenses?

Accrued expenses are costs your business has incurred but not yet paid or recorded through an invoice. These include items like wages, utilities, interest, and services that have been used during the period but billed later.

Accrued expenses are recognized in the period they happen, not when the cash leaves your account. This keeps your financial statements aligned with the accrual method of accounting and ensures your profit margins reflect true operational activity.

These expenses often show up near month-end and quarter-end. Common examples include payroll earned in the last week of the month but paid in the next, or an agency service delivered but not yet invoiced.

Accrued expenses appear as liabilities on your balance sheet until you pay them. Once settled, the entry moves from accrued liability to cash payment, clearing the obligation from your books.

When to accrue an expense

You accrue an expense when a cost is incurred during a reporting period but not yet paid or invoiced. The timing depends on when the goods or services are received, not when the payment happens. Here’s a quick checklist to help determine when to record an accrual:

  • Your business has received the good or service
  • You haven’t received an invoice yet
  • Your business hasn’t made payment
  • The accounting period is closing
  • You need to capture the expense in the correct reporting period

For example, if your company uses electricity through December 31 but doesn’t receive the bill until January 5, you should accrue the utility expense in December.

Accrued expenses vs. accounts payable

Both accrued expenses and accounts payable are liabilities, but they differ in timing and documentation.

Use accrued expenses when no invoice has been received by the end of the reporting period. Use accounts payable when the invoice has arrived, but you haven’t paid it.

Accrued expenses

Accounts payable

Trigger

Expense incurred, no invoice received

Invoice received, payment not made

Documentation

Estimated or informal

Formal invoice on hand

Recording timing

When you use the service/goods

When you receive the invoice

Impact on financials

Affects expense recognition and net income for the period

Affects cash flow and outstanding liabilities

Payment status

Not yet billed or formally requested

Billed but pending payment

Clearance method

Reversed or settled once invoice arrives or paid

Cleared when invoice is paid

Example

Utilities used but not yet billed

Office supplies received with an invoice

Accrued vs. prepaid expenses

Accrued and prepaid expenses reflect opposite sides of timing in accounting. Accrued expenses involve receiving goods or services before payment. Prepaid expenses involve paying before receiving goods or services.

Accrued expenses

Prepaid expenses

Timing

Payment after use

Payment before use

Financial impact

Increases liabilities

Increases assets

Balance sheet classification

Current liability

Current asset

Accounting treatment

Recorded as an expense and liability

Recorded as an asset, then expensed over time

Reversal or adjustment

Settled when paid or invoiced

Expensed monthly or as the service is consumed

Role in month-end close

Often added manually based on internal data

Typically scheduled or automated

Example

Legal services rendered in December

Annual insurance premium paid up front

How do you record an accrued expense journal entry?

You record an accrued expense journal entry by debiting the expense account and crediting a liability account. This entry reflects the cost your business has incurred but not yet paid or invoiced.

These expenses are recorded in three steps: the initial recognition, the reversal, and the payment.

1. Initial recognition

Record the expense in the correct accounting period by debiting the appropriate expense account and crediting an accrued liabilities or accrued expenses payable account.

Example: Legal fees

Your company receives $4,000 in legal services on December 29 but won’t get the invoice until January.

Journal entry (December 31):

Date

Account

Debit

Credit

12/31

Legal expense

$4,000

12/31

Accrued liabilities

$4,000

2. Reversing the entry

Reverse the entry at the start of the next accounting period to prevent duplicate expense recognition.

Journal entry (January 1):

Date

Account

Debit

Credit

1/1

Accrued liabilities

$4,000

1/1

Legal expense

$4,000

3. Paying and clearing the liability

Once the invoice arrives and payment is made, record the actual cash outflow.

Journal entry (January 5):

Date

Account

Debit

Credit

1/5

Legal expense

$4,000

1/5

Cash

$4,000

Examples of accrued expenses with journal entries

Wages earned but unpaid

Employees earned $6,500 by December 31. Payroll isn’t processed until January 5.

Date

Account

Debit

Credit

12/31

Wages expense

$6,500

12/31

Accrued liabilities

$6,500

Utility bill

Your business used $1,200 in electricity in December. The bill arrives in January.

Date

Account

Debit

Credit

12/31

Utility expense

$1,200

12/31

Accrued liabilities

$1,200

Professional services

A consultant completed $2,500 of work in late December. You receive the invoice in January.

Date

Account

Debit

Credit

12/31

Consulting expense

$2,500

12/31

Accrued liabilities

$2,500

Interest expense

Your company has a loan that accrues $900 in interest for December, but payment is due in January.

Date

Account

Debit

Credit

12/31

Interest expense

$900

12/31

Accrued liabilities

$900

How accrued expenses affect financial statements

Accrued expenses touch every part of your company’s core financial statements. Recording them accurately improves transparency and helps stakeholders understand your financial position.

  • Balance sheet: Accrued expenses increase current liabilities, which reduces your working capital and reflects obligations that haven’t yet been paid
  • Income statement: Recognizing expenses in the correct period lowers net income, giving a more accurate view of profitability
  • Cash flow statement: These entries don’t affect the cash flow statement until you make a cash payment; then the cash outflow appears under operating activities

GAAP vs. IFRS: Accrual compliance

Under both GAAP and IFRS, companies must use the accrual method to record expenses when they’re incurred. The core treatment of accrued expenses is similar across both standards. Where GAAP and IFRS differ is in their emphasis on disclosure and recognition criteria.

Here’s how the two standards compare:

Area

GAAP

IFRS

Recognition timing

Requires expenses to be recorded when incurred, based on clear and often rule-based criteria

Also records when incurred, with greater use of principles and judgment

Disclosure requirements

Often includes detailed footnotes on accrual estimates and methods

Requires disclosure of key assumptions and potential estimation risks

Matching principle

Emphasized strongly for aligning expenses with related revenues

Also follows matching but may allow broader interpretation

Flexibility in estimates

Lower flexibility; tends to favor consistency across entities

Greater flexibility for management judgment

Standard-setting body

Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB)

Global adoption

Primarily used in the United States

Used in over 140 countries including EU, Canada, and Australia

Best practices for recording accrued expenses

Even with the right systems in place, it’s easy to miss or mishandle accruals during a busy close. These best practices can help you stay consistent, reduce errors, and speed up your reporting:

  • Maintain a schedule of typical month-end accruals. Keep a running list of expenses that routinely need accruals, such as utilities, interest, or contractor payments
  • Review your general ledger at each close. Scan for expense activity late in the period that hasn’t hit accounts payable or hasn’t been invoiced yet
  • Set up templates to reduce manual work. Prebuilt accrual entry templates can save time and improve consistency across periods
tip
Manually reversing entries can slow down your close.

Tools like Ramp help you identify patterns in recurring expenses and automate accruals without needing vendor invoices. Ramp’s accounting automation flags potential entries, syncs them to your GL, and reduces the risk of double-booking. This keeps your books cleaner and your close cycle faster.

Why accruals matter for small businesses

Accrual accounting may seem like a big-company concept, but it’s critical for small businesses, too. Recording expenses when they’re incurred—rather than when they’re paid—gives you a clearer view of your profitability and obligations during each accounting period. It helps you match costs to revenue more precisely, which improves decision-making and long-term planning.

This clarity supports better budgeting, more accurate forecasting, and stronger financial reporting. It’s especially useful when applying for loans or presenting performance to investors or partners.

Using the accrual basis of accounting instead of cash basis accounting also positions you for growth, since many lenders and partners prefer GAAP-compliant financial statements.

Common mistakes to avoid when recording accrued expenses

Even small errors in accruals can snowball into reporting issues, misstated liabilities, or compliance problems. Below are some of the most common mistakes companies make when recording accrued expenses—and how to prevent them.

  • Forgetting to post a reversal: Set reminders in your accounting system. This mistake can lead to double-counted expenses and overstated liabilities in the new period.
  • Using outdated or incomplete estimates: Cross-check against actuals each close. Poor estimates reduce accuracy and can throw off your income statement. Revisit your estimates monthly and update them using current vendor or usage data.
  • Missing recurring accruals at year-end: Review prior-year entries for missed patterns. Finance teams often rush year-end closes, making it easy to overlook repeat accruals. Compare your current trial balance to the prior year’s closing entries to identify any recurring accruals you may have missed.

Automate accruals and elevate your close

Manual accrual tracking slows your close, increases risk, and eats up your team's time. Leading finance teams reduce friction by automating journal entries, minimizing manual corrections, and staying audit-ready.

Ramp's accounting automation software lets you create recurring accruals, automatically reverse them in the next period, and flag entries missing required documentation, —all within one platform. You’ll reduce manual errors, gain audit-ready documentation, and save hours each month during close.

This automation-first approach improves accuracy, accelerates the reporting cycle, and frees your team to focus on financial strategy instead of repetitive data entry.

Ready to learn more? Try an interactive demo and see why Ramp customers have saved $10 billion and 27.5 million hours since making the switch.


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Ken BoydAccounting and finance expert
Ken Boyd is a former CPA, accounting professor, writer, and editor. He has written four books on accounting topics, including The CPA Exam for Dummies. Ken has filmed video content on accounting topics for LinkedIn Learning, O’Reilly Media, Dummies.com, and creativeLIVE. He has written for Investopedia, QuickBooks, and a number of other publications. Boyd has written test questions for the Auditing test of the CPA exam, and spent three years on the Audit staff of KPMG.
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