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Understand what accrued expenses are and how to record them. Learn more about these and similar accounting terms in this guide to tracking accrued expenses.
What are accrued expenses?
Accrued expenses are expenses that a business incurs, but hasn't yet 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 must eventually be paid 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. Let's explore the distinctions in the table below:
| Accrued expenses | Accounts payable | Prepaid expenses |
|---|---|---|
| Goods or services you pay for after receiving them; expenses that must be accounted for, even though you haven't received an invoice for them | Goods or services you've received invoices for, but have not yet paid | Goods or services you paid for before receiving them |
How to track and manage 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 was 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 Does an Accounts Payable Specialist Do?
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 must be paid 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 in income taxes, property taxes, or other company taxation. This tax is typically based on the company's profits, but it can also be based on other factors, 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 2023 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
If you'd like to learn more about accrued expenses and other accounting mechanisms, you might like to consider the Fundamentals of Accounting Specialization, offered by the University of Illinois on Coursera. This specialization is designed to help 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.
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