What are Accrued Expenses? Examples, Tracking, and Accounting

Accrued expenses are liabilities an accountant includes in the books before you pay them. Including accrued expenses in the books forms the basis for accrual accounting, which identifies expenses when they occur instead of when you pay them. By placing accrued expenses in the books at the time they occur, you create a more accurate picture of your business's financial health because they show your intention to make future cash payments. 

Learn about accrued expenses, how they differ from accounts payable and prepaid expenses, how you can track them for your business, and about some other important accounting terms. 

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

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

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:

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:

Important accounting terms 

The following are accounting terms that you might come across as you research business accounting methodologies:

Accounts payable

Accounts payable is the amount of money a company owes to its creditors for goods and services received. The term refers to expenses that have been invoiced but not yet paid. This debt is typically paid within 30 to 90 days.

Read more: What Is Accounts Payable? Definition and Careers

Unpaid invoices

An unpaid invoice is a request for payment that has not yet been received. This can happen for several reasons, such as the customer not yet receiving the goods or services or the customer not yet approving the invoice.

Overdue invoices (or past due bills)

An overdue invoice is a bill that has not been paid within the agreed-upon timeframe. An invoice can become overdue because a company forgets to make the payment or can’t afford to cover the cost of the invoice. An overdue invoice is also called a “past due bill" and might attract a late penalty fee, which you must pay in full. 

Current liabilities

When you’re dealing with current liabilities, you’re managing obligations typically due within one year. Current liabilities are important because they represent the short-term obligations of a company. You might have a few different types of current liabilities, which include accounts payable, taxes payable, and short-term debt. 

Taxes payable

Taxes payable is money you owe to the government for income taxes, property taxes, or other company taxation. This tax is typically based on the company's profits, but other factors affect it, such as the company's size or revenue. The taxes payable may include federal, state, and local taxes.

Read more: How to Become a Tax Accountant: Your Guide

Short-term debt

Short-term debt is money you borrowed from lenders and need to pay back within one year. 

This type of debt can include credit card debt, car loans, and other types of loans. Paying off short-term debt is important because it can help you avoid high interest rates and late fees. Short-term debt is another term for "current liabilities."

Cash flow statement

A cash flow statement is a financial statement that summarizes the movement of cash and cash equivalents that enter and leave a company. This statement works alongside the balance sheet and income statement to paint a picture of a business's financial health. It can keep you abreast of different sources of income and where you're spending money in your business.

Read more: A Guide to Bookkeeping: Skills, Salaries, and Careers

Build accounting skills with Coursera

By tracking accrued expenses, you create a more accurate financial picture of your business as you track expenses as they occur. To learn more about accrued expenses and other accounting mechanisms, consider the Fundamentals of Accounting Specialization, offered by the University of Illinois on Coursera. This specialization helps business owners and managers learn accounting basics.

Consider also the Intuit Academy Bookkeeping Professional Certificate. Inside, you'll discover bookkeeping fundamentals like assets, liabilities, equity, and financial statement analysis.