An accrued expense records a cost already incurred but not yet paid or invoiced, matching the expense and related liability to the correct reporting period.
An accrued expense is a cost a business has already incurred but has not yet paid or fully recorded by the reporting date. The adjusting entry recognizes both the expense in the period that received the goods or services and a liability for the amount still owed.
Accrued wages, utilities, professional fees, interest, and taxes are common examples. The invoice or payment date does not determine when the expense belongs in accrual-basis financial statements.
Assume a company uses electricity throughout December but will not receive the utility invoice until January. Based on meter data and prior billing rates, it estimates the December cost at $18,400.
The December 31 adjusting entry is:
1Dr Utilities expense $18,400
2 Cr Accrued utilities liability $18,400
The entry reduces December profit and increases liabilities. It does not use cash in December.
When the $18,900 invoice arrives in January, the company can clear the accrual and record the $500 estimate difference. One possible entry is:
1Dr Accrued utilities liability $18,400
2Dr Utilities expense 500
3 Cr Accounts payable $18,900
The exact workflow may use an automatic reversal on January 1 followed by normal invoice processing. Either approach should avoid recording the same expense twice.
A ten-business-day payroll totals $60,000. Six of those days fall before the December 31 year-end, and employees are paid after year-end. If labor cost is earned evenly, the year-end accrual is:
1$60,000 x 6 / 10 = $36,000
The company records $36,000 of wage expense and an accrued payroll liability at December 31. The remaining $24,000 belongs to January.
This timing matters because omitting the entry would:
The estimate should also consider employer payroll taxes, bonuses, paid leave, or other obligations when the applicable accounting policy requires them.
| Accrual | Evidence commonly used | Main estimation issue |
|---|---|---|
| Payroll and bonuses | Time records, compensation plans, payroll calendar | Service period, eligibility, and related taxes |
| Utilities | Meter readings, usage history, tariff or contract | Unbilled consumption and rate changes |
| Professional services | Engagement terms, hours, project status | Work completed but not yet billed |
| Interest | Principal, contractual rate, dates, day-count basis | Time elapsed and changing rates |
| Taxes and levies | Tax base, enacted rules, filing schedules | Jurisdiction, period, and measurement basis |
| Goods received | Receiving records, purchase orders, supplier terms | Quantity, price, returns, and cutoff |
An accrual should be tied to evidence that the entity received the relevant benefit or otherwise incurred a present obligation before period-end. A budget or expected future purchase is not enough by itself.
| Term | Timing pattern | Typical presentation |
|---|---|---|
| Accrued expense | Expense recognized before invoice or payment | Expense plus accrued liability |
| Accounts payable | Supplier invoice received and processed before payment | Trade payable |
| Prepaid expense | Cash paid before the related benefit is consumed | Asset, then expense over time |
| Provision | Present obligation has uncertain timing or amount | Liability measured under the applicable provision standard |
| Contingent liability | Existence or settlement remains sufficiently uncertain | Often note disclosure rather than recognition, depending on the framework and facts |
The line between an accrued expense and accounts payable can depend on the entity’s ledger design. The more important questions are whether the obligation exists, whether the amount is complete and supportable, and whether it is recorded in the correct period.
Recording an accrued operating expense usually increases operating expense and current liabilities without an immediate cash payment. Under an indirect cash-flow presentation, the change in the related operating liability helps reconcile accrual-basis profit to operating cash flow.
That does not mean every accrued expense has identical presentation. Interest, taxes, capital-project costs, inventory-related costs, and unusual obligations can have different classification or capitalization requirements. The applicable accounting standard and the nature of the transaction control.
For analysis, a rising accrued-expense balance can reflect growth, billing timing, payment timing, estimation changes, or delayed settlement. It is not automatically evidence of stronger cash generation or financial distress.
Accrued-expense accounting is fact- and framework-dependent. This page is educational and does not provide accounting, audit, tax, legal, credit, or investment advice.