What are Accrued Expenses? Examples, Benefits, and How to Record Them

Accrued expenses—sometimes called accrued liabilities—are expenses that were incurred in a different accounting period than they were paid. In other words, it's a technique that allows accountants to represent an obligation to pay for goods or services that have been received but haven't been invoiced or paid in a given accounting period.

It's an important concept because it helps match expenses to the period in which they were incurred, regardless of when the payment is made, providing a more accurate picture of a company's financial position. Learn more about accrued expenses, how they differ from accounts payable and prepaid expenses, and how you can track them for your business. Afterward, build your skills in accounting with the University of Illinois' Fundamentals of Accounting Specialization.

What are accrued expenses?

Accrued expenses are expenses that a business incurs but hasn't paid yet. For example, a company might receive goods or services and pay for them at a later time. It’s a similar concept to buying something with a credit card. You receive the item immediately, but you'll pay for it later and need to account for it in your budget. 

Tracking accrued expenses, accounting for them during each reporting period, and budgeting accordingly is important for businesses because you need to have an accurate picture of where your business stands financially. In addition, these expenses can:

• Represent a liability for your company (i.e., money that you must eventually pay out)

• Have a significant impact on your financial statements

• Have an impact on cash flow

• Reflect your business's financial health

• Build up over time, including interest on a loan, rent for a property, or services rendered but not yet invoiced

• Bring greater awareness to business spending, including how much you are spending and where

Learn more: How to Get a Job as an Accountant

Accrued expenses vs. accounts payable vs. prepaid expenses

While researching accrued expenses, you may come across similar terms: prepaid expenses and accounts payable. Explore the distinctions in the table below:

Examples of accrued expenses

You may have accrued expenses from various sources. A few examples of the accrued expenses that your company might need to track include:

• Loan interest

• Wage expenses

• Payments owed to contractors and vendors

• Government taxes

• Property rental costs

• Utility expenses

• Rent expense

• Computer equipment

• Office supplies

Build your knowledge of important accounting terms with our glossary guide: Accounting Terms: A to Z Glossary

How do you record accrued expenses? 

For businesses, it's important to keep track of accrued expenses, such as utilities, rent, or salaries. You can track expenses in the following ways:

• Accounting software: Typically lets you create an accrued expenses account that will help you keep track of how much money you owe and when the payments are due

• A spreadsheet or journal: Allows you to list all of your accrued expenses and can be helpful if you want to see a clear overview of what you owe and when the payments are due

Keep in mind: When recording accrued expenses in accounting records (known as "journal entries"), it's important to use the correct accrual date. The accrual date is generally the date that the expense incurred (e.g., December 31st for interest expense) rather than the date it’s paid on.

Is an accrued expense a debit or credit?

An accrued expense—also called accrued liability—is an expense recognized as incurred but not yet paid. In most cases, an accrued expense is a debit to an expense account. This increases your expenses. You may also apply a credit to an accrued liabilities account, which increases your liabilities.

Advantages of an accrued expenses journal

An accrued expense journal is a bookkeeping method that businesses use to track expenses and ensure that they’re paid promptly. Having an accrued expense journal comes with several advantages. This includes helping your business:

• Keep track of your spending.

• Budget for upcoming expenses.

• Negotiate better payment terms with suppliers.

• Track trends in their spending behavior.

• Forecast profits.

Learn about the profit and loss statement as one tool for tracking the financial health of your business in this video from the Intuit Academy Bookkeeping Professional Certificate:

Build and strengthen your accounting skills on Coursera

Gain access to over 10,000 courses from industry leaders such as Intuit, Google, IBM, and Amazon with a monthly or annual Coursera Plus subscription. Build or strengthen your knowledge about accounting through a number of Professional Certificates and Specializations, which you can add to your resume once you complete them.