Accrued expenses: What they are, examples, and how to record them
- What are accrued expenses?
- How accrued expenses work in accrual accounting
- Common types of accrued expenses
- Accrued expenses vs. other accounting terms
- How to record and manage accrued expenses
- Pros and cons of recording accrued expenses
- Accrued expense examples
- Use Ramp to streamline accrual accounting
Accrued expenses are costs your business has incurred but hasn't paid yet. Think of utilities you’ve used this month but won’t pay until the next, or employee salaries earned but not yet distributed at period-end.
Recording these expenses when they happen gives you a clearer view of your company’s financial health. It aligns costs with the periods they relate to, helping you make more accurate decisions about spending, cash flow, and growth.
What are accrued expenses?
Accrued expenses are costs your business has incurred but hasn’t yet paid. Under accrual accounting, you record these expenses when the benefit is received rather than when cash leaves your account. The timing difference is straightforward: you receive the service now, but the payment happens later.
For example, your employees may work throughout December while payday falls in early January, making December’s wages an accrued expense. The same applies to utility bills used this month and invoiced the next, interest accumulating on loans between payment dates, or rent owed at month-end but paid on the first of the following month.
Key characteristics of accrued expenses
- Timing: You record the expense in the period it’s incurred, even if no invoice has arrived
- Balance sheet impact: Accrued expenses appear as current liabilities because payment typically occurs within 12 months
- Income statement impact: They increase expenses for the current period to match costs to the revenue they help generate
- Cash flow impact: They don’t affect cash flow until the payment is made
Why do accrued expenses matter?
Accrued expenses matter because they give you a more accurate picture of your company’s financial position. Recording costs when they occur, not when they’re paid, helps you budget for upcoming obligations, manage cash flow, and forecast more reliably.
Some accrued expenses may also affect your tax situation, since certain costs can qualify as business tax deductions in the year they’re incurred. Accrued expenses are required under the GAAP matching principle as well, which ensures financial statements reflect the true timing of your company’s activity.
Accurate accruals also strengthen your audit readiness and support financing conversations by showing that your records reflect all obligations, even those not yet invoiced or paid.
How accrued expenses work in accrual accounting
Accrued expenses are a core part of accrual accounting, the method most businesses use to record financial activity. Under this approach, you recognize revenues when they’re earned and expenses when they’re incurred, even if no cash has moved yet.
This ties directly to the matching principle, which requires you to record expenses in the same period as the revenues they support. If your team completes work in March but payroll runs in early April, those wages belong in March’s financial statements.
Accrual accounting offers a more accurate view of performance, especially for businesses with recurring obligations or timing differences between work performed and cash payments. Public companies must use this method, and many growing businesses adopt it because it helps them understand true profitability and plan ahead.
Accrual accounting vs. cash basis accounting
The choice between accrual accounting and cash basis accounting affects when you recognize revenue and expenses, and it determines whether accrued expenses appear in your books. Accrual accounting records activity when it occurs, while cash basis accounting records it only when money changes hands.
| Aspect | Accrual accounting | Cash basis accounting |
|---|---|---|
| Revenue recognition | When revenue is earned | When payment is received |
| Expense recognition | When the expense is incurred | When the payment is made |
| Accrued expenses | Recorded before payment | Not recorded until cash is paid |
| Financial accuracy | Shows a complete financial picture | Shows only cash movement |
| Complexity | More detailed and complex | Simpler to maintain |
| GAAP compliance | Required for public companies | Not GAAP-compliant |
Most established businesses use accrual accounting because it provides a clearer view of performance and future obligations. Cash basis accounting is simpler and works well for very small businesses, sole proprietors, and freelancers with limited transaction volume.
The difference becomes clear with accrued expenses. If you incur a December utility cost but pay the bill in January, accrual accounting records the expense in December. Cash basis accounting wouldn’t capture it until payment occurs.
The accounting process for accrued expenses
Recording accrued expenses starts with creating a journal entry that captures the cost in the period it’s incurred. Journal entries use debits and credits to keep your books balanced, and they document how each transaction affects your accounts.
Debits increase asset and expense accounts, while credits increase liability and revenue accounts. When you accrue an expense, you debit the expense account to recognize the cost and credit an accrued liability to show what you owe. If you accrue $2,000 in December salary that will be paid in January, you debit salary expense and credit salaries payable for $2,000.
When the bill is eventually paid, you reverse the accrual and record the payment. This removes the liability from your books and reduces cash. The sequence ensures your financial statements reflect when expenses occur, not just when cash moves.
Common types of accrued expenses
Businesses encounter several types of accrued expenses in their day-to-day operations. Below are the most common categories you’ll need to identify and record in your accounting system.
Wages and salaries
Payroll accruals occur when employees earn wages during one accounting period but receive payment in the next. This is common because pay periods rarely align with your month-end close.
If your team earned $22,000 for work completed December 26–31 and payday falls on January 5, you would accrue $22,000 in December to match the cost to the right period.
Interest expenses
Interest accrues daily on loans and business lines of credit between payment dates. Even when payments are made monthly or quarterly, interest accumulates continuously based on your outstanding balance and annual rate.
For a $100,000 loan at 6% annual interest, you accrue about $16.44 per day ($100,000 * 0.06 / 365). If your December statement closes on the 25th but you pay on January 10th, you must accrue the interest for December 26–31.
Utilities and operating expenses
Utility companies typically bill after services are used, creating timing gaps that require accruals. Electricity, water, gas, and phone services used in December often show up as invoices in January.
If the bill hasn’t arrived, you can estimate the accrual using historical averages. For example, if your last three electricity bills averaged $1,850, you would accrue $1,850 for December’s usage.
Taxes
Many tax obligations accrue between payment dates. Income taxes, payroll taxes, property taxes, and sales taxes all accumulate during the period in which they’re incurred.
Quarterly estimated taxes mean you accrue tax liability for several months before making a payment. Annual property taxes assessed at year-end but paid in installments also require monthly accruals to match the cost to the period benefiting from the property.
Supplies and equipment purchases
If you receive supplies or equipment before the vendor invoice arrives, you’ve incurred an accrued expense. This often happens with purchase orders where delivery precedes billing or with services completed before invoicing.
For example, if your team receives $5,000 in office supplies on December 28th and the invoice arrives January 15th, you record the expense in December to reflect when the supplies were actually used.
Accrued expenses vs. other accounting terms
Accrued expenses are often confused with accounts payable, prepaid expenses, and accrued liabilities. These concepts all reflect timing differences in how costs and obligations appear in your books. The key distinctions below help you understand when each applies.
| Feature | Accrued expenses | Accounts payable | Prepaid expenses | Accrued liabilities |
|---|---|---|---|---|
| Definition | Expenses you’ve incurred but not yet paid or received an invoice for | Amounts owed after receiving goods or services and an invoice | Payments made in advance for future goods or services | A broader category that includes all unpaid obligations, including accrued expenses |
| Timing of recognition | When the expense occurs, even without an invoice | When the invoice is received | When payment is made | When the obligation arises and is measurable |
| Balance sheet impact | Recorded under current liabilities | Recorded under current liabilities | Recorded under current liabilities | Recorded under current liabilities |
| Cash movement | No cash has moved yet | Cash payment expected soon | Cash has already moved | May or may not involve a future payment |
| Income statement impact | Increases current-period expenses | Affects expenses when invoice matches service or delivery | No immediate impact until the benefit period begins | Impacts expenses as the liability becomes due |
| Associated documentation | Internal accrual entry, timesheets, service logs | Vendor invoice | Payment receipts or contracts | Internal estimates, legal or tax documents |
| Use in accrual accounting | Helps match expenses to revenue accurately | Completes the payment cycle after accrual | Defers expenses to future periods | Ensures liabilities are captured before close |
| Audit and compliance risk | High if missed | Moderate if invoices aren’t processed on time | Low if amortized correctly | High if estimates are inaccurate |
Accrued expenses vs. accounts payable
Accounts payable and accrued expenses are both short-term obligations, but they differ in timing and documentation. Accounts payable arise only after you’ve received an invoice for goods or services. Accrued expenses capture costs you’ve incurred but haven’t yet been billed for, such as unpaid wages or utilities.
Accrued expenses help keep period-end financials accurate when bills haven’t arrived. Accounts payable help you manage confirmed invoices and payment schedules. Both appear as liabilities, but accrued expenses rely on estimates while accounts payable rely on actual invoice amounts.
Accrued expenses vs. prepaid expenses
Prepaid expenses are the opposite of accrued expenses. They involve paying up front for future benefits, such as annual insurance premiums or prepaid software subscriptions. These payments are recorded as assets until the service period begins.
Accrued expenses work in reverse: you receive the benefit first and pay later. This timing difference affects budgeting and cash flow management because accrued expenses delay cash outflow, whereas prepaid expenses require it immediately.
Accrued expenses vs. accrued liabilities
These two terms describe different viewpoints of the same transaction. An accrued expense is the cost recognized on your income statement. An accrued liability is the corresponding obligation recorded on your balance sheet.
When you accrue a cost—for example, a service performed before billing—you record both the expense and the liability. Most professionals use the terms interchangeably because they refer to the same underlying event within the accounting system.
How to record and manage accrued expenses
Recording accrued expenses accurately requires a consistent process and the right tools. Clear steps help you capture costs in the correct period and avoid errors that can impact your financial statements.
Step-by-step recording process
Start by identifying expenses you've incurred but haven’t yet paid at period-end. Review vendor contracts, payroll schedules, loan agreements, and service arrangements to catch items that lack invoices or completed payment.
Next, calculate the accrual amount using available information. Use actual figures for known amounts such as salaries, and estimate amounts like utilities based on recent invoices, usage patterns, or prorated annual costs.
Create your accrued expense journal entry by debiting the appropriate expense account and crediting the related accrued liability account. If you're accruing $3,000 in December utilities, you would debit utilities expense for $3,000 and credit accrued utilities payable for the same amount.
When the bill arrives and you pay it in January, reverse the accrual and record the actual payment to update your accounts.
Best practices and common pitfalls
Accrual accounting relies on accuracy, and small mistakes can lead to reporting gaps or extra work during close. Avoid common pitfalls with practices that help ensure consistency.
- Missing obvious accruals: Recurring expenses like utilities or professional services often get overlooked. Use checklists and assign ownership for each category.
- Double-counting expenses: Costs spanning multiple periods can be recorded twice. Set up monthly reviews and consistent cutoff dates to catch discrepancies.
- Poor documentation: Vague entries can cause confusion later. Document your reasoning and supporting calculations so future reviews are straightforward
- Being too conservative with estimates: Understating expenses inflates profits and affects budgeting. Communicate with department leads who know about upcoming costs.
- Being too aggressive with estimates: Overstating expenses shifts results across periods. Ground your estimates in vendor quotes or historical data
Consistent processes help create accurate financial statements and a smoother month-end close.
Tools and software solutions
Modern accounting software such as QuickBooks, Xero, and NetSuite includes features for managing accrued expenses. These tools let you set up recurring accrual entries, schedule automatic postings, and create reversing entries that clear at the start of a new period.
Automation features can streamline the accrual process by reducing manual data entry, improving coding accuracy, and keeping vendor and invoice information organized in one place. Ramp also integrates with major accounting tools, helping you record and manage accruals more efficiently during month-end close.
Systematic tracking provides better visibility into your financial position. Detailed reports help you compare accruals with actual invoices, spot trends, and support planning and budget management.
Pros and cons of recording accrued expenses
Recording accrued expenses improves the accuracy of your financial reporting, but it also adds some operational complexity. Understanding both sides helps you build a smoother close process.
| Aspect | Pros | Cons |
|---|---|---|
| Financial reporting | Matches expenses to the correct period, improving income statement accuracy | Requires reconciliation if accruals differ from actual invoices |
| Regulatory compliance | Supports GAAP and IFRS standards and strengthens audit readiness | Requires strong documentation to avoid misstatements |
| Cash flow visibility | Highlights upcoming cash obligations before payment occurs | Can cause confusion if users mistake accruals for cash on hand |
| Budgeting and forecasting | Improves cost tracking and forecast accuracy | Harder to model if accrual inputs are inconsistent or outdated |
| Internal controls | Encourages alignment across teams to identify future obligations | Increases dependency on other departments for timely information |
| Accounting operations | Helps capture expenses before invoices arrive for a smoother close | Adds workload and complexity if systems and processes are outdated |
While accruals require careful tracking and periodic review, the improved financial accuracy and early visibility into upcoming obligations often outweigh the added effort.
Accrued expense examples
Let’s look at some real-world examples to see how accrued expenses function in practice and how they influence financial statements across different types of businesses.
Small business example: Local marketing agency
Sarah runs a 12-person marketing agency that closes its books on December 31. Her team worked the final week of December, earning $15,000 in wages, but the next payroll date is January 5. The agency also incurred $2,400 in December electricity costs, though the utility bill will not arrive until mid-January.
If Sarah doesn’t record these accrued expenses, December’s profit would be overstated by $17,400. Expenses would spike in January instead, making it harder to track performance or plan cash flow. To keep her records accurate, she records the following journal entries on December 31:
Accrued wages
| Account | Debit | Credit |
|---|---|---|
| Wage expense | $15,000 | |
| Accrued wages payable | $15,000 |
Accrued utilities
| Account | Debit | Credit |
|---|---|---|
| Utilities expense | $2,400 | |
| Accrued utilities payable | $2,400 |
When January arrives and she pays the wages on the 5th, Sarah reverses the accrued wages entry:
| Account | Debit | Credit |
|---|---|---|
| Accrued wages payable | $15,000 | |
| Cash | $15,000 |
The same process applies when the utility bill arrives. This approach helps Sarah evaluate profitability, plan cash flow, and price client work more effectively.
Enterprise example: Manufacturing company
ABC Manufacturing operates a large facility with a fiscal year ending December 31. The company carries a $5 million loan with monthly interest payments due on the 15th at an annual rate of 4.8%. Because December’s payment covered November 16 through December 15, interest must be accrued for December 16–31.
ABC also awards annual bonuses to 200 employees. In mid-December, management finalized the bonus pool at $1.2 million, payable in March. Because employees earned these bonuses during the current year, ABC must accrue the full amount at year-end.
The interest calculation for the remaining 16 days of December is:
($5,000,000 * 0.048) / 365 * 16 = $10,520
ABC records the following December 31 journal entries:
Accrued interest
| Account | Debit | Credit |
|---|---|---|
| Interest expense | $10,520 | |
| Accrued interest payable | $10,520 |
Accrued bonuses
| Account | Debit | Credit |
|---|---|---|
| Bonus expense | $1,200,000 | |
| Accrued bonus payable | $1,200,000 |
These accruals significantly affect reported profitability, earnings calculations, and tax liability. Without them, ABC would appear more profitable than it is, which could influence decisions about dividends, capital investments, or expansion.
Accruing these expenses ensures the company stays compliant with generally accepted accounting principles (GAAP) and presents an accurate picture of its financial performance to stakeholders.
Use Ramp to streamline accrual accounting
Ramp’s accounting automation software helps finance teams manage accruals and other close activities more efficiently. Our platform reduces manual work and supports accurate, up-to-date records across your accounting systems.
Features include:
- Automated expense reporting and approvals, including OCR-powered receipt matching
- Integrations with the tools you already use, including accounting platforms and ERPs such as NetSuite, QuickBooks, and Sage Intacct
- AP automation that lets you record, approve, and pay invoices without manual data entry
Watch our demo video to see how Ramp customers save an average of 5% a year across all spending.
FAQs
Accrued expenses do not appear directly on the cash flow statement because no cash has moved yet. However, when the payment is made, it shows up under operating activities as a cash outflow. This separation helps distinguish between the timing of expense recognition and actual cash movement.
Most businesses review their accrued expenses monthly, typically during the close process. For smaller companies, quarterly reviews may be enough, depending on transaction volume. Regular check-ins help catch missed accruals, reduce errors, and ensure estimates stay accurate over time.
Under IRS rules, businesses using accrual accounting can deduct accrued expenses in the tax year when the liability becomes fixed and the amount is reasonably estimable. This is known as the “all-events test.” Some expenses may also fall under recurring item exceptions, which allow consistent deductions for routine accruals.
Discrepancies between accrued entries and final invoices are common indicators. If you frequently adjust accruals after receiving invoices, your estimates may lack accuracy. Sudden changes in budget variances or unexplained shifts in expense trends can also signal issues in accrual assumptions.
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