Accrued expenses are costs a business has incurred but has not yet paid or received an invoice for. They normally appear as current liabilities on the balance sheet because the company owes the money even though cash has not left the bank. Common examples include wages earned by employees, interest, utilities, taxes, and professional services used before billing.
Why Accrued Expenses Exist
Under accrual accounting, expenses are recorded when the business receives the benefit, not simply when payment occurs. This matches costs with the revenue and activity from the correct period. Without accruals, a month can look more profitable merely because a vendor has not sent its bill yet.
A Simple Example
Suppose employees earn $8,000 during the final week of March but payday falls in April. At March 31, the business records $8,000 of wage expense and an $8,000 accrued payroll liability. When payroll is paid, cash decreases and the liability is removed. April does not absorb an expense that belongs to March.
Accrued Expenses vs. Accounts Payable
Accounts payable usually contains bills the company has received and entered. Accrued expenses estimate obligations for which no invoice has arrived or payment is not yet due. Both are liabilities, but the documentation and timing differ. When a later invoice replaces an estimate, the books may need an adjustment.
Common Accruals for Small Businesses
Payroll and related taxes are frequent accruals because work periods and paydays often cross month-end. Other examples include interest accumulated between loan payments, utilities used but not yet billed, sales commissions, vacation obligations, legal or accounting work, and property taxes that build throughout the year.
How to Record an Accrued Expense
The normal entry increases an expense and increases an accrued liability. In the next period, the entry is either reversed before the actual bill is recorded or cleared directly when payment occurs. Consistent procedures prevent the same cost from being recorded twice.
Why the Estimate Matters
An accrual should be reasonable and supported. Use employee time records, contracts, loan schedules, prior bills, meter readings, or other evidence. Small differences can be corrected when the final amount becomes known. Large unexplained estimates can distort profit and make financial reports less credible.
How Accruals Affect Profit and Cash Flow
Recording an accrual reduces profit before it reduces cash. That is one reason net income and bank balance do not move together. The expense appears on the profit and loss statement, while the unpaid obligation appears on the balance sheet. Cash flow changes later when the bill is paid.
Review Accruals Every Month
At month-end, review payroll dates, unbilled services, loan interest, taxes, and recurring costs. Compare the accrued liability schedule with the general ledger and remove old balances that have already been paid. An accrual that remains unchanged for months may indicate a missed invoice or a bookkeeping error.
What Owners Should Take Away
Accrued expenses keep financial statements from overstating profit and understating what the business owes. They do not mean cash has already been spent, but they warn that a future payment relates to activity already completed. Tracking them carefully improves cash forecasts and makes monthly results easier to trust.
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