Accrued expense
A cost the business has incurred in a period but not yet been invoiced for or paid, recorded as a liability at period end.
In short
- It puts the expense in the right month even though the bill hasn't arrived.
- Common examples: utilities, wages earned but not yet paid, and goods received but not invoiced.
- Most accruals are reversed at the start of the next period, when the real invoice is booked.
An accrued expense is a cost that belongs to the current period but has not yet been billed. At month end, the business estimates the amount and records it as an expense and a liability, usually called accrued liabilities. When the invoice arrives later, the accrual is reversed and the invoice is recorded normally.
Common accruals
- Utilities: electricity used in March but billed in April.
- Wages: days worked in the last week of the month but paid in the next pay run.
- Goods received not invoiced: deliveries that arrived before the supplier's invoice.
- Professional fees: legal, audit or consulting work done but not yet billed.
- Interest: interest on a loan that has built up since the last payment.
Estimating accruals
Accruals rely on the best information available: purchase orders and receipts for goods, timesheets for wages, contracts and emails for services, last month's bill for utilities. Small differences between the accrual and the final invoice are normal and flow through the next period.
Accruals are one of the main tasks of the month-end close. Missing them understates expenses and overstates profit; accruing costs twice, once as an accrual and again when the invoice is booked without reversing, does the opposite.
Worked example
Accruing March's electricity
A bakery's electricity bill for March will arrive around April 15. Based on the meter and last year's March bill, it accrues $2,300 at March 31: debit Utilities, credit Accrued liabilities. On April 1 the entry is reversed. When the bill arrives at $2,410, it is recorded normally, and the $110 difference lands in April.