In plain English
Accrued expenses are common at month end: wages earned but not yet paid, utilities used but not yet billed, or interest accumulating between payment dates.
You record them as an expense and a liability, then clear the liability when the bill is paid. Reversing entries make this cleaner.
Why it matters
If a cost belongs to March but the bill arrives in April, skipping the accrual makes March look more profitable than it was and April look worse. For a business that reviews margins monthly or pays bonuses on quarterly profit, that timing error can lead to real decisions based on the wrong numbers.
Accruals also make the balance sheet honest. Wages earned by staff, interest building on a loan and utilities already used are real obligations on the last day of the month. Leaving them off understates liabilities, which matters when a lender or buyer reads your statements.
Worked example
Employees earned $6,000 in the last four days of March, paid April 3. On March 31, debit wages expense $6,000 and credit accrued wages $6,000. The April 3 payroll clears the liability.
How to handle it
- List recurring costs that are often billed after the month ends, such as payroll for days worked, utilities and professional fees.
- Estimate each amount from timesheets, last month's bill or a quote, and keep a note of how you got the number.
- Record a journal entry that debits the expense and credits an accrued liabilities account dated the last day of the month.
- Set the entry to reverse on the first day of the next month, or reverse it manually.
- When the real bill arrives, enter it normally and check that the accrual and the bill roughly offset.
Common mistakes
- Accruing the cost and then forgetting to reverse it, which counts the same expense twice when the actual bill is entered.
- Accruing tiny items every month, which adds work without changing any decision you would make.
- Using the accounts payable account for estimates, which mixes guesses with real vendor bills and confuses the aging report.
- Recording an accrual with no support, so a reviewer cannot tell later where the amount came from.
Not the same as: Prepaid expense
An accrued expense is a cost you have used but not yet paid for. A prepaid expense is a cost you have paid for but not yet used. See Prepaid expense.
Go deeper
- Accrued Expenses and Accrued Revenue Explained: Understand accruals: how to record expenses you owe but have not been billed for, and income earned but not invoiced, with simple examples.
- Prepaid Expenses and Accrued Liabilities at Year End: Learn how items paid early or owed but unpaid are handled at year end, and what records to keep for accrual-based books.
Related terms
- Accumulated depreciation: The total depreciation recorded on an asset since you started using it, shown as a reduction of the asset's cost.
- Aging report: A report that lists unpaid invoices or bills grouped by how long they have been outstanding.
- Accrual basis accounting: A method that records income when it is earned and expenses when they are incurred, not when cash moves.
Common questions
What is an accrued expense?
A cost you have incurred but not yet paid or been billed for, recorded so the right period carries it.
Can you give an example of accrued expense?
Employees earned $6,000 in the last four days of March, paid April 3. On March 31, debit wages expense $6,000 and credit accrued wages $6,000. The April 3 payroll clears the liability.
Do I need accrued expenses if I use the cash basis?
Usually not for cash basis reports, since expenses count only when paid. They matter when you want accrual statements for management, a lender or a buyer.
What if my estimate is off?
That is normal. When the actual bill comes in, the small difference lands in the new month. If estimates are often far off, change how you calculate them.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.