
- What are accrued expenses?
- Accrual accounting vs. cash accounting: Where accrued expenses fit in
- How accrued expenses affect financial statements
- Recording an accrued expense journal entry
- Common scenarios that require accrued expense entries
- How accurate accruals strengthen your reporting

An accrued expense journal entry records a cost that has been incurred but not yet paid or billed. It creates a liability and matches it with the related expense, ensuring your financial statements reflect what the business truly owes at the end of an accounting period.
This entry type is a core part of accrual accounting and is required to stay compliant with Generally Accepted Accounting Principles (GAAP). It helps maintain accurate books, especially during month-end or year-end close.
What are accrued expenses?
Accrued Expense
Accrued expenses are costs a business has incurred but has not yet paid or been invoiced for. These expenses are recorded in the period they occur to give a more accurate view of what the business owes, even if no cash has changed hands.
Accrued expenses are costs a business has incurred but has not yet paid or been invoiced for. These expenses are recorded in the period they occur to give a more accurate view of what the business owes, even if no cash has changed hands.
Common examples of accrued expenses include unpaid wages, utilities used but not billed, and professional services received before the invoice arrives. These costs are tracked to meet the matching principle, which requires businesses to report expenses in the same period as the related revenue.
Accrued expenses appear as liabilities on the company’s balance sheet and reduce net income on the income statement. Ignoring them can distort your financial reports, understate liabilities, and inflate short-term profits. Most businesses using accrual accounting rely on these entries to stay compliant and transparent.
Accrual accounting vs. cash accounting: Where accrued expenses fit in
The key difference between accrual and cash accounting comes down to timing.
Accrual accounting records revenue and expenses when they’re earned or incurred, regardless of when cash moves. Cash accounting only records transactions when money is received or paid.
Accrued expenses only exist under the accrual method. They allow businesses to account for costs that haven’t been paid yet but still impact the current period’s financial performance.
This method gives stakeholders a clearer picture of financial health. It also supports better forecasting, tighter controls, and more accurate reporting.
Cash basis accounting, on the other hand, is simpler but limited. It works for very small businesses but doesn't reflect what a company truly owes or earns in a given period. That’s why public companies and most growing businesses use the accrual method of accounting.
When to record accruals under GAAP and IFRS
Both GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) require businesses to record accrued expenses using the matching principle. This ensures expenses show up in the same period as the revenue they support, even if the business hasn’t paid the bill yet.
Under GAAP, you must record expenses when:
- The expense is probable and related to the current accounting period
- The amount can be reasonably estimated
- The company has a present obligation to make the cash payment in the future
If your business has already received a service or used a resource, you are required to record it. That includes situations where no invoice has arrived yet, such as utilities, legal work, or contract labor.
IFRS applies a similar standard but more explicitly emphasizes liability recognition. Accruals are required when:
- The company has a present obligation (legal or constructive)
- An outflow of economic resources is probable
- The cost can be measured reliably
A constructive obligation can arise from contracts and past business practices or published policies that create an expectation you will settle the debt.
How accrued expenses affect financial statements
Accrued expenses affect financial statements because they ensure your reports reflect costs that have been incurred. Without them, your liabilities appear lower, and your profits look higher than they actually are. This leads to inaccurate financial reporting, poor decision-making, and potential compliance issues.
Balance sheet impact
On the balance sheet, accrued expenses are recorded as current liabilities. This shows the business has an obligation to pay for goods or services it has already received. Until that payment is made, the liability remains open.
For example, if your business owes $10,000 in wages at the end of the month but hasn’t paid them yet, you will record a $10,000 accrued expense under current liabilities. This increases your total liabilities and reduces your net working capital.
This is essential for presenting an accurate financial position. Without accrued liabilities, your business may appear more liquid than it actually is.
Income statement impact
On the income statement, accrued expenses appear as operating expenses and reduce your net income for the period. This is because the cost is recognized when it’s incurred, not when it’s paid.
Using the same wage example, that $10,000 also shows up as a payroll expense on your income statement for the month. This ensures your financial performance reflects what it actually costs to run your business during that period.
The income statement stays aligned with the matching principle, which is key to accrual-based bookkeeping. Expenses are matched to the revenue they help generate, giving a more accurate measure of profitability.
Recording an accrued expense journal entry
Accrued expense journal entries are typically recorded at the end of each accounting period. This could be monthly, quarterly, or annually, depending on your reporting cycle.
- Step 1: Identify the unpaid expense. Start by confirming that your business received a good or service during the current accounting period but hasn’t yet received an invoice or made payment. This could be a utility bill for electricity used in December but not billed until January or wages earned by employees in the last week of the month that will not be paid until the next payroll cycle.
- Step 2: Determine the amount to accrue. Estimate the cost as accurately as possible. You can calculate the amount using past billing data, contract terms, service hours logged, or known rates. For example, if your legal team worked 20 hours at a $300/hour rate, and you haven't received an invoice yet, you would accrue $6,000 in legal fees. Your estimate must be reasonable and supportable in case of an audit.
- Step 3: Select the appropriate accounts. Choose the correct general ledger accounts for the entry. You will increase (debit) the relevant expense account and increase (credit) the liability account that reflects the unpaid obligation. For instance, if you're accruing a marketing invoice, debit the Marketing Expense account and credit Accrued Liabilities or Accounts Payable.
- Step 4: Post the journal entry in your accounting system. Enter the transaction as of the last day of the accounting period. This ensures the expense is recognized in the correct month or quarter. Double-check that the entry date aligns with your reporting period to avoid timing errors.
- Step 5: Document the entry for audit support. Keep a clear record showing how you calculated the accrual. Include backup documentation like contract terms, internal time logs, utility usage reports, or historical invoices. Strong documentation helps support your estimates during audits and speeds up financial reviews.
- Step 6: Reverse the entry in the next period (if required). You will often need to reverse the journal entry at the beginning of the next period. This prevents double-counting once the actual invoice is received and processed. Ramp supports this workflow by letting teams schedule or automate routine adjustments like reversals, ensuring the next period starts clean and aligned with prior entries.
Common scenarios that require accrued expense entries
Accrued expense entries are usually recorded by accountants, controllers, or finance team members responsible for period-end close. These entries ensure that financial statements reflect actual obligations and not just completed transactions.
Salaries and wages
Employee wages are one of the most common accruals. If the payroll cycle crosses over a reporting period, you will need to record the portion of wages earned before the period ends but not yet paid. For example, if a biweekly payroll covers December 25 to January 7, the portion earned through December 31 must be accrued in the prior year.
Without this entry, labor costs in December will be understated, and January will reflect inflated expenses. This skews performance metrics and causes reporting mismatches. Payroll accruals are among the finance teams' top three adjustments during the month-end close.
Utilities and rent
Most utility bills arrive after the service period ends. If your business receives a January bill for electricity used in December, you’ll need to accrue the December portion to reflect the correct cost of operations.
Rent may also need to be accrued if there are delays in billing or if your lease agreement does not align with your reporting cycle. This is especially relevant when rent is paid quarterly or annually. Failing to accrue facility-related expenses can result in inaccurate operating cost reporting and understated liabilities on your balance sheet.
Professional services
Legal, consulting, and outsourced services are often delivered before an invoice is issued. If a service provider completes work before period-end, the cost must be accrued, regardless of when the invoice arrives.
For example, if your marketing agency finishes a campaign in June but invoices in July, you’ll accrue the cost in June to match the expense with the work performed. This ensures consistency and compliance with accrual accounting standards.
Delays in accruing professional services are a key reason mid-sized firms miss internal reporting deadlines at month-end and quarter-end. In contrast, larger firms, who increased their SaaS spend by 21% last quarter are adopting automation tools more aggressively, helping them reduce delays and streamline close processes.
Ramp can help reduce missed accruals by automatically flagging transactions that match known vendor patterns or account codes, especially for recurring professional services. With suggested rules and bulk editing, finance teams can stay on top of period-end adjustments without slowing down the close.
How accurate accruals strengthen your reporting
Accurate accruals help you close your books with confidence. They make sure your financial statements reflect what your business actually owes, not just what’s been paid. That clarity is critical for audits, forecasting, and compliance.
Ramp helps accounting teams stay consistent by automating transaction coding, standardizing rules, and syncing entries in real-time. That means fewer manual errors, faster close cycles, and reporting stakeholders can actually rely on.

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