What is Accrued Expenses?

Accrued expenses are recorded when a cost has been incurred in a period but no bill has been entered or payment made yet. They are recorded as a current liability so the period's expenses are complete under accrual accounting.

Common examples

• Wages earned by employees in the last days of the month but paid in the next payroll
• Interest on a loan accrued since the last payment date
• Utilities used in the month but billed later
• Professional fees for work performed but not yet invoiced
• Bonuses earned during the year and paid after year end

Example

Employees are paid every two weeks. The month ends on a Wednesday, and three days of wages totaling $6,000 will be paid in the next payroll. An adjusting entry records $6,000 of wage expense and an accrued payroll liability at month end. When payroll runs, the liability is cleared.

Accrued expenses vs accounts payable

Accounts payable are amounts for which you have received a bill. Accrued expenses are estimates or calculations for costs without a bill yet. Both are liabilities.

Reversing entries

Many accountants reverse accruals on the first day of the next period, so the actual bill or payroll can be recorded normally without double counting.

Tax treatment

For accrual-method taxpayers, the timing of deductions for accrued expenses follows specific tax rules, including rules for amounts owed to related parties and for some bonuses. The IRS describes accounting methods in Publication 538. Our month-end close checklist includes reviewing accruals.

Related terms

• Accrual Accounting: Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when cash moves.
• Accounts Payable: Accounts payable is the money your business owes suppliers and vendors for goods or services received but not yet paid for.
• Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.

Browse more definitions in the small business glossary.