Money Matters

What are accrued expenses? A guide for growing businesses

Accrued expenses are liabilities representing costs your business has incurred but not yet paid or been invoiced for. Find out how they differ from accounts payable and how proper recording of these expenses can help you keep your financial statements accurate and useful.

Published September 2, 202611 min read Share

This article was originally published on April 14, 2025 but has been refreshed and re-published with new content in September 2026.

When you’re managing a business, keeping track of your finances can be a bit like juggling. There are a lot of concepts and processes to wrap your head around and stay on top of.

Some of these can seem very similar but may, in fact, have quite distinctly different meanings and implications.

Accrued expenses are one of those things that are easy to get wrong if you’re not clear on how and when to record them.

In this article we’ll look at what accrued expenses are and how they compare to related accounting terms.

We’ll also explore how to record accrues expenses correctly and why getting this right matters for your business’s financial planning and cash flow.

Key takeaways

• Accrued expenses are costs your business has incurred but hasn’t yet paid or been invoiced for.
• Recording accrued expenses in the correct accounting period provides a more accurate picture of your company’s financial performance and obligations.
• Unlike accounts payable, accrued expenses are recognized before an invoice is received and are often based on reasonable estimates.
• Accrual accounting requires an adjusting journal entry, followed by a reversing entry once the actual invoice or payment is recorded.
• Modern accounting software can automate much of the accrual process, helping reduce errors and improve cash flow planning.

Here’s what we cover:

What are accrued expenses?

Accrued expenses, also known as accrued liabilities, are expenses your business has already incurred but not yet paid for.

They can build up over time and are considered “current liabilities,” as you’d typically need to pay them within a year—possibly within a much shorter period.

These expenses are often linked to ongoing costs your business needs to account for consistently, such as salaries, taxes, and interest on business loans.

Or they might be for goods and services that you’ve received but not yet been invoiced for by the supplier.

For example, the wages your employees earn this month may not be paid until the first of the following month. These wages should be recorded as accrued expenses in the current period.

Otherwise, when you get to the end of your financial year, the wages you owe your staff for the last 30 days will be left off your financial statement for those 12 months.

Because accrued expenses aren’t tied to an invoice, they require deliberate tracking within your accounting process.

Advantages of keeping an accrued expense journal

Maintaining a dedicated accrued expense journal, rather than recording costs only when you’re invoiced or when cash changes hands, brings several practical benefits for your business.

• A more accurate financial picture: accrued expenses are recorded in the period they’re actually incurred. So, your financial statements reflect your true costs and profitability for that period, rather than an incomplete picture based only on what’s been paid or billed so far.
• Better spending visibility: an accrued expense journal gives you a running, itemized view of costs building up in the background, like wages, interest, utilities, and other obligations. Nothing slips through unnoticed simply because an invoice hasn’t landed yet.
• Improved budgeting and cash flow planning: because you’re tracking these costs as they accumulate, you can anticipate upcoming lump-sum payments (like a large payroll run or a quarterly interest payment) well before they’re due, rather than being caught off guard.
• Stronger negotiating position with suppliers and vendors: a clear, ongoing record of what your business owes, and when, means you have full visibility into your obligations rather than reacting to bills as they arrive. This can give you the leverage and confidence to negotiate more favorable payment terms.
• More reliable trend analysis and forecasting: consistently tracked accrued expenses make it easier to spot patterns in recurring costs over time, which in turn supports more accurate forecasting of future expenses and profits.
• Consistency across reporting periods: recognizing costs as they’re incurred, rather than when they’re paid, smooths out the lumpiness that cash-based tracking can create. This way, month-over-month or quarter-over-quarter comparisons are more meaningful.

How to record an accrued expense

Recording an accrual involves two separate journal entries: one to recognize the expense when it’s incurred, and a second to reverse it once the actual invoice or payment comes through.

This two-step journal entry process keeps your books accurate without double-counting the cost.

The initial journal entry

When you recognize an accrued expense, you make a double entry that follows standard bookkeeping principles: you debit the relevant expense account and credit an accrued liabilities account.

The debit increases your expenses for the period, reflecting the cost you’ve actually incurred.

The credit increases your liabilities, reflecting the obligation you now owe. Since you typically won’t have an exact invoice amount yet, this entry is often based on a reasonable estimate.

For example, you might calculate one month’s worth of accrued interest on a loan, even though the actual bill won’t arrive until a later date.

This entry is dated as of the last day of the accounting period, regardless of when the invoice eventually arrives or the payment is made.

That date is what ensures the expense lands in the correct period on your financial statements.

The reversing entry

Once the next accounting period begins, you reverse the original accrual entry. You are basically flipping the debit and credit to cancel it out.

This step matters because when the actual invoice arrives (or payment is made), you’ll record that transaction normally, in full.

Without a reversing entry, you’d end up with the cost counted twice: once as an estimate in the prior period, and again as the real transaction in the current one.

Many accounting software solutions can generate reversing entries automatically once the original accrual is flagged, which removes the risk of forgetting this crucial step.

How do accrual entries play out in ledger software?

In practice, recording an accrued expense typically unfolds in three steps: the initial accrual at period-end, an automatic reversal at the start of the next period, and then the real invoice and payment recorded normally once they arrive.

Here’s what that looks like in a typical accounting software workflow.

We’ll use the example of a business that receives a $10,000 utility bill for services used in June, but the invoice doesn’t actually arrive until July:

• Step 1: Accrual (dated June 30): At month-end close, before financial statements are finalized, you enter an adjusting journal entry: debit Utility Expense for $10,000, and credit Accrued Liabilities for $10,000. This ensures your June financials reflect the true cost of utilities used that month, even without an invoice in hand.
• Step 2: Reversal (dated July 1): At the start of the new period, most accounting software will automatically post a reversing entry: debit Accrued Liabilities for $10,000, credit Utility Expense for $10,000. This zeroes out the estimate so it doesn’t linger on the books.
• Step 3: Actual invoice and payment (dated sometime in July): When the real $10,000 invoice arrives, you record it as you normally would: debit Utility Expense, credit Accounts Payable. Once you pay it, you debit Accounts Payable and credit Cash.

The net effect: the expense is counted exactly once, even though the paperwork and cash outflow didn’t happen until July.

Accounting terms commonly confused with accrued expenses

Accrued expenses share similarities with several other accounting concepts, which can make them easy to mix up in day-to-day bookkeeping.

Understanding what sets each one apart from the rest will help you record and report your finances accurately.

Term	Balance sheet classification	Key distinguishing factor versus accrued expenses
Accounts payable	Liability	Recognized once an invoice is received, with a defined payment term (e.g., 30 days); invoice-driven, not period-driven.
Outstanding expenses	Liability	A known, specific amount that’s due but unpaid; no estimation involved, unlike accrued expenses.
Prepaid expenses	Asset	Paid in advance for something not yet received; on the opposite timing and balance sheet side from accrued expenses.
Provisions	Liability	Involves genuine uncertainty about amount or timing; accrued expenses are typically known with reasonable precision.

Accrued expenses versus accounts payable

Accounts Payable (AP) and accrued expenses are both current liabilities representing money your business owes. The key difference is timing and how each one comes to be recorded.

• Accounts payable is recognized once you receive an invoice—say, from a supplier who ships materials with 30-day payment terms. The liability is there in your AP software, undisputed and quantified, until you pay it off.
• Accrued expenses, on the other hand, are recorded at the end of an accounting period regardless of whether an invoice has arrived. Utility usage is a common example: you’ve consumed the electricity or gas for the month, but the bill won’t arrive until sometime after your period closes, so you still need to record that estimated cost as an accrued liability.

In short, AP is invoice-driven, while accrued expenses are period-driven.

Accrued expenses versus outstanding expenses

Strictly speaking, “outstanding expenses” typically refers to costs that were due to be paid within the current period but weren’t, for whatever reason (a missed payment, a processing delay, and so on).

Accrued expenses, in contrast, are expenses that have been incurred but for which a bill or due date hasn’t necessarily arrived.

The practical distinction is that an outstanding expense usually implies a specific, known amount that’s simply unpaid.

An accrued expense may still be an estimate, since you’re recognizing a cost before you’ve been formally billed for it.

Accrued expenses versus prepaid expenses

This is the cleanest contrast of the four because prepaid expenses are directly visible on the opposite side of the balance sheet.

Accrued expenses are liabilities—money you owe for something you’ve already received. Prepaid expenses are assets—money you’ve already paid for something you haven’t received yet.

Think of a business paying 12 months of insurance premiums up front: that payment is recorded as a prepaid expense (an asset) and gradually recognized as an actual expense over the year as the coverage is used.

Accrued expenses versus provisions

Provisions are the trickiest to separate from accrued expenses because both involve recognizing a cost before cash actually changes hands.

The difference comes down to certainty.

Accrued expenses are generally known with reasonable precision; you know roughly how much wages, interest, or received-but-unbilled goods will cost, even if the exact invoice hasn’t arrived.

Provisions, on the other hand, involve genuine uncertainty about either the amount or the timing of a future obligation.

A common example is a company setting aside funds for a probable but unresolved lawsuit: it doesn’t yet know the exact payout or when it will be required, but it still needs to reflect the likely liability on its books.

In practice, accrued expenses are a near-certain cost with an estimate attached, while provisions are a probable cost with real uncertainty attached.

Keep your liabilities in check

Accrued expenses let your business recognize costs in the period they actually happen, not just when cash changes hands or an invoice shows up.

This gives you a clearer, more accurate picture of your finances.

Accruals are easy to mix up with related terms like accounts payable, outstanding expenses, prepaid expenses, and provisions, so knowing what sets each apart helps you record things correctly and avoid costly missteps.

Getting the mechanics right (recognizing costs at period-end, then reversing those entries once the real transaction lands) takes some discipline.

However, accounting software eliminates most of the manual effort by taking care of entry adjustments and automatic reversals. With the right process in place, you’ll always know exactly what your business owes.

Frequently asked questions about accrued expenses

How do accrued expenses affect cash flow?

Accrued expenses don’t immediately affect cash flow because no payment has been made yet. Instead, they affect your income statement and balance sheet by recognizing a cost before cash leaves the business. The cash flow impact occurs later, when the liability is settled.

When is reporting of accrued expenses a legal requirement?

For most small businesses, using accrual accounting (and therefore recording accrued expenses) isn’t strictly mandated, and many are free to use the simpler cash basis accounting instead. However, once a company grows past certain thresholds, accrual accounting typically becomes a requirement rather than a choice.

Publicly traded companies and any business required to follow Generally Accepted Accounting Principles (GAAP) must use accrual accounting, which means accrued expenses have to be recognized and reported.

Businesses above certain revenue thresholds set by tax authorities may also be required to use the accrual method for tax reporting purposes.

Even where it isn’t strictly required, lenders, investors, and auditors often expect accrual-based financial statements, since they provide a more accurate picture of a company’s obligations than cash-based records alone.

What are some common mistakes or risks when recording accruals?

Some of the most common mistakes people make is forgetting to reverse an accrual when payment is received, accidentally accruing an expense that’s already been paid, and errors related to dating accrual expenses or the actual costs involved.

If you forget to reverse an accrual once the actual invoice or payment comes through, the same expense will be counted twice, overstating your costs for the period.

Accidentally accruing an expense for a payment that’s been paid can happen when communication between accounting and operations teams breaks down.

Because accruals are often based on estimates rather than final invoice amounts, there’s also a risk of recording a figure that’s meaningfully off from the actual cost. If the variance is large enough, this can distort your financial statements.

Timing errors, such as dating an accrual to the wrong period, undermines the whole purpose of matching expenses to when they were actually incurred.

As accrual accounting is more complex and requires more journal entries than cash accounting, it carries a higher risk of human error, particularly for businesses that aren’t using automated accounting software.

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