A Guide to Accrued Expenses and How to Record Them

At the end of any accounting period, there are inevitably expenses your business has incurred but has not yet been billed for. Your employees have worked hours that have not yet appeared on a payroll run. Your utility provider has supplied electricity you have used but not yet invoiced for. Your accountant has done work during the month but will not send a bill until next month.

If you only record expenses when you receive a bill, these costs are missing from your financial statements. The result is an incomplete picture — your expenses are understated, your profit is overstated, and your balance sheet does not reflect your true obligations. Accrued expenses fix this problem.

What are accrued expenses?

An accrued expense is a cost that has been incurred during an accounting period but has not yet been paid or invoiced. It represents a liability — you owe money for something you have already received or consumed.

Accrued expenses are the opposite of prepayments. With a prepayment, you pay before you receive the benefit. With an accrual, you receive the benefit before you pay.

Common examples

Wages and salaries — If your accounting period ends on Friday but your payroll does not run until the following Wednesday, you have a liability for the wages earned but not yet paid. This is often the largest accrued expense.

Utilities — You use electricity, gas, water, and internet throughout the month, but the bills typically arrive weeks later. The cost of usage during the current period should be accrued.

Interest on loans — Interest accrues daily on most loans, but payments are typically made monthly. At period-end, interest has accrued since the last payment.

Professional fees — Your accountant, lawyer, or consultant may be doing work during the current period but will not invoice until later.

Rent — If rent is due but not yet paid at period-end, it should be accrued (though rent paid in advance is a prepayment, not an accrual).

Taxes — Tax liabilities often accrue over a period even though payment is due at specific dates.

Bonuses — Employee bonuses earned during the period but paid later should be accrued when the obligation becomes probable.

Why accruals matter

Accurate profit measurement

The matching principle in accounting states that expenses should be recognised in the same period as the revenue they help generate. If you perform services in March that generate revenue in March, but the related costs (subcontractor fees, utilities, wages) are not billed until April, recording those costs in April mismatches expenses and revenue.

Accruals ensure each period bears its fair share of costs, giving you an accurate profit figure for each month, quarter, or year.

Accurate balance sheet

Accrued expenses appear as current liabilities on your balance sheet. Without them, your liabilities are understated and your equity is overstated — the balance sheet does not reflect your actual financial position.

Consistent reporting

When you accrue expenses consistently, your month-to-month financial reports are comparable. Without accruals, months where large bills are received look expensive while months between bills look artificially cheap.

Regulatory and tax compliance

Depending on your jurisdiction and accounting method, accruing expenses may be required for tax purposes. Businesses using accrual accounting must record expenses when incurred, not when paid.

How to record accrued expenses

The initial accrual

At period-end, identify expenses incurred but not yet billed. For each, create a journal entry:

| Account | Debit | Credit | |---------|-------|--------| | Expense account (e.g., Utilities) | 500 | | | Accrued expenses (liability) | | 500 |

The expense is recognised in the correct period, and a liability is recorded on the balance sheet.

When the bill arrives

When you subsequently receive the invoice, there are two common approaches:

Approach 1: Reverse the accrual, then record the bill

First, reverse the accrual:

| Account | Debit | Credit | |---------|-------|--------| | Accrued expenses (liability) | 500 | | | Expense account | | 500 |

Then record the actual bill through your normal accounts payable process. The expense will be re-recorded at the actual amount.

Approach 2: Record the bill against the accrual

Record the bill with the liability account (accrued expenses) as the offset instead of the expense account:

| Account | Debit | Credit | |---------|-------|--------| | Accrued expenses (liability) | 500 | | | Accounts payable | | 500 |

If the actual bill differs from your accrual estimate, adjust the difference to the expense account.

When the estimate differs from reality

Accruals are often estimates — you may not know the exact amount until the bill arrives. If the actual amount differs from your accrual:

• If the bill is higher: Record the additional amount as an expense in the current period
• If the bill is lower: The reversal creates a small credit to the expense account

Small differences are normal and expected. The purpose of accruals is to get the right period, not necessarily the exact amount.

Setting up an accruals process

Step 1: Identify recurring accruals

List the expenses that regularly need to be accrued at period-end. Common items include:

• Wages for days worked but not yet paid
• Utility bills (electricity, gas, water, internet, phone)
• Professional fees (accounting, legal)
• Loan interest
• Rent if paid in arrears
• Sales commissions
• Employee benefits

Step 2: Estimate amounts

For each recurring accrual, establish how you will estimate the amount:

• Wages: Calculate based on days worked x daily rate
• Utilities: Use the prior month's bill as an estimate, or an average
• Professional fees: Ask your advisor for an estimate, or use prior period fees
• Interest: Calculate based on the loan balance x rate x days since last payment

Step 3: Create a checklist

Build a month-end accruals checklist that lists every item to be accrued, the estimation method, and the accounts to be used. This ensures nothing is missed and the process is consistent.

Step 4: Automate where possible

Many accruals are the same or similar each month. Your accounting software may support recurring journal entries that can be set up once and posted each period, saving time and reducing the chance of missing an accrual.

Step 5: Review and reverse

At the start of each new period, reverse the previous period's accruals (unless using a method that does not require reversal). Then record the actual expenses as they are invoiced.

Best practices

Be consistent

Apply the same accrual methodology each period. Inconsistency creates artificial fluctuations in your financial results and makes period-to-period comparison unreliable.

Accrue material items

Not every minor expense needs to be accrued. Focus on items that are material — those that would meaningfully affect your financial statements if omitted. A 20 phone bill can probably wait for the actual invoice. A 5,000 consulting fee should be accrued.

Set a materiality threshold appropriate for your business size.

Document your estimates

Record the basis for each accrual estimate. If you accrue 800 for utilities based on the prior month's bill, note that. This helps with review, supports audit queries, and makes it easier for someone else to take over the process.

Review accrual balances

Periodically review the accrued expenses balance on your balance sheet. Stale accruals — amounts that have been sitting for months without being matched to an invoice — indicate a problem. Either the expense did not materialise (and the accrual should be reversed) or the invoice was recorded without clearing the accrual.

Do not over-accrue

The purpose of accruals is accuracy, not conservatism. Deliberately over-accruing expenses to reduce reported profit is not appropriate accounting practice. Estimate reasonably and adjust when actual amounts are known.

Accrued expenses vs accounts payable

Both represent amounts your business owes, but they are different:

Accounts payable: You have received an invoice from a supplier but not yet paid it. The amount is known and documented.

Accrued expenses: You have incurred a cost but have not yet received an invoice. The amount may be estimated.

When the invoice arrives, an accrued expense typically converts to an accounts payable, which is then settled through normal payment processes.

Using accounting software

Modern accounting software simplifies accrual management:

• Recurring journal entries for predictable monthly accruals
• Accrued expense accounts set up in your chart of accounts
• Reversal features that automatically reverse accruals at the start of the next period
• Balance sheet reporting that shows accrued expense balances for review
• Audit trails documenting when accruals were posted and reversed

Relentify's accounting platform supports journal entries with reversal functionality, making it straightforward to manage month-end accruals and maintain accurate financial records.

Start this month

If you are not currently accruing expenses, start with your next month-end close. Identify the three to five largest expenses that are regularly incurred before being billed, estimate the amounts, and post the accrual journals. The improvement in your financial statement accuracy will be immediate and meaningful.