Accrued Expenses Explained
You used the electricity, the freelancer finished the work and your team earned their hours, but the bills have not arrived yet. Those costs still belong to this month. Accrued expenses are how your books capture them, so your profit tells the truth instead of looking better (or worse) than it really is.
Key takeaways
- Accrued expenses are costs your business has incurred but not yet paid. They sit on the balance sheet as a liability until you pay them.
- They matter most under accrual accounting, where costs are matched to the period in which they happen, not the day cash leaves your account.
- Common examples include wages earned but not yet paid, utilities used, interest owed and work done by contractors who have not invoiced yet.
- A short monthly accruals list, reversed the following month, is usually all a small business needs.
Early July is a natural moment to think about accruals. The first half of the year has just closed, and if you are pulling together half-year numbers for yourself, a lender or an investor, you want June to show June's real costs. Yet many June bills will only land in July: the phone bill, the freelance designer's invoice, the overtime your team worked in the last week of the month.
If you simply wait for those bills, June looks cheaper than it was and July looks more expensive. Accrued expenses fix that mismatch. This guide explains what they are in everyday language, how they show up in your books, how to record them without fuss and where small businesses most often trip up.
What accrued expenses are
An accrued expense is a cost you have already incurred but have not yet paid, and often have not even been billed for. You have received the benefit (the service, the hours of work, the use of a building or a loan) so the cost belongs to the current period. Because you still owe the money, it is recorded as a liability on your balance sheet.
Think of it as an honest IOU your books write to themselves. "We used this, we owe this, we will pay it soon." When the bill arrives and you pay it, the liability disappears.
Accrual accounting vs cash accounting
Accrued expenses only exist in accrual accounting. Here is the difference in short:
- Cash accounting records income when money arrives and costs when money leaves. It is simple, and many very small businesses and sole traders use it where the rules allow.
- Accrual accounting records income when it is earned and costs when they are incurred, regardless of when cash moves. It gives a truer picture of profit for each month or quarter.
Which method you must or may use depends on your country, your business structure and your size. In both the US and the UK there are rules about who can use the cash basis, and they change from time to time, so check the current guidance from the IRS or HMRC or ask your accountant. Even if you file taxes on a cash basis, you can still keep accrual-based management accounts to understand your business better.
Accrued expenses vs accounts payable
Both are short-term debts you owe, so they get mixed up. The practical difference is the invoice:
| Accrued expenses | Accounts payable | |
|---|---|---|
| Invoice received? | Usually not yet | Yes |
| Amount | Often an estimate | Exact, from the invoice |
| Typical examples | Wages earned, utilities used, interest owed | A supplier bill sitting in your inbox |
| What happens next | Becomes a payable or is paid when the bill arrives | Paid by the due date |
Common mistake
Confusing accrued expenses with prepaid expenses. A prepaid expense is the opposite: you paid in advance (an annual insurance premium, say) for something you have not used yet, so it sits as an asset. Accrued means "used now, pay later." Prepaid means "paid now, use later."
Common accrued expenses in a small business
You do not need to accrue every small cost. Focus on items that are regular, meaningful in size and reliably billed after the period ends. These are the usual suspects:
- Wages and salaries: if your pay period ends after the month end, your team has earned days of pay you have not paid yet.
- Payroll taxes and employer contributions tied to those wages.
- Bonuses and commissions earned this period but paid later.
- Utilities: electricity, gas, water and phone bills that arrive weeks after you used the service.
- Interest on loans that builds up daily but is charged monthly or quarterly.
- Contractor and freelancer work completed but not yet invoiced.
- Professional fees such as your accountant's year-end work, which you know is coming.
- Rent or service charges billed in arrears.
- Taxes that relate to the period but are paid later. How these are handled can be technical, so let your accountant guide you.
Pro tip
Look at last month's bank statement for payments that relate to the month before. Every one of those is a candidate for a regular accrual. If the same type of bill always arrives late, it belongs on your monthly accruals list.
How accrued expenses show up in your books
An accrual touches two places at once. On the profit and loss statement, the cost appears as an expense in the period you incurred it. On the balance sheet, an equal amount appears as a current liability, usually called "accrued expenses" or "accruals."
In double-entry terms, you debit the expense account (for example, utilities) and credit the accrued expenses liability account. When you later pay the bill, you clear the liability and the cash goes out. The expense is not counted twice; it simply moved to the right month.
Example
Imagine Sam, who runs a small print studio. At the end of June he knows three things: his team has worked six days since the last payday (about $2,400 of gross wages), June's electricity bill of roughly $310 will arrive in mid-July, and a freelance designer finished a $650 project on 28 June but has not invoiced. Sam records $3,360 of accrued expenses on 30 June. His June profit now reflects those costs, and his balance sheet shows $3,360 owed. In July, when the bills arrive and he pays them, the liability clears. (All figures are made up for illustration.)
Without those accruals, Sam's June would look $3,360 more profitable than it was, and July would look $3,360 worse. For a small business, a swing like that can change the story you tell your bank, your partners or yourself.
What about reversing entries?
Most accounting software lets you mark a journal entry to reverse automatically on the first day of the next month. That is the simplest way to handle routine accruals. On 1 July the accrual flips back, and when the real bill is entered in July, the two cancel out. The net effect is that the cost lands in June, July stays clean and you do not need to match anything by hand.
If your software does not offer auto-reversal, add a calendar reminder to reverse the entry manually. Forgetting is the most common cause of double-counted costs.
How to record accrued expenses step by step
You can run a month-end accruals routine in about 30 minutes once it is set up. Here is a simple process that works for most small businesses using accrual-based books:
- List what you used but have not paid. Go through your recurring suppliers, payroll calendar, loan schedule and active contractor projects.
- Estimate each amount. Use last month's bill, a contract rate, timesheets or a quote. Reasonable estimates are fine; you will correct them when the real bill arrives.
- Skip the tiny items. Set a materiality line that makes sense for your size, so you are not accruing a small parking charge.
- Post one journal entry per item (or one combined entry) on the last day of the month, with a clear description.
- Set it to auto-reverse on the first day of the next month, if your software allows.
- Keep your workings. Save the list and how you estimated each figure. Your accountant will ask.
- Compare estimates with actual bills next month and adjust how you estimate if you are often far off.
A simple monthly accruals template
Copy these columns into a spreadsheet and keep one tab per month:
| Item | Supplier or source | Basis of estimate | Amount accrued | Expense account | Reversed? | Actual bill |
|---|---|---|---|---|---|---|
| Wages, 25 to 30 June | Payroll | Timesheets for 6 days | $2,400 (example) | Wages | Yes, 1 July | $2,415 (example) |
| June electricity | Energy supplier | Average of last 3 bills | $310 (example) | Utilities | Yes, 1 July | $298 (example) |
| Logo project | Freelance designer | Agreed project fee | $650 (example) | Contractors | Yes, 1 July | $650 (example) |
The "Actual bill" column is your feedback loop. After a few months you will see which estimates are reliable and which need a better method.
Pro tip
Ask freelancers and contractors to send a short note of work completed by the last working day of each month, even if their invoice comes later. It turns guesswork into a quick lookup.
Why accrued expenses matter beyond the books
Accruals can feel like accounting housekeeping, but they affect real decisions.
Truer monthly profit
When costs land in the month they belong to, you can compare months fairly. A spike in July that is really June's utility bill will not send you hunting for a problem that does not exist.
Better cash planning
Your accrued expenses balance is a list of bills that are definitely coming. Adding it to your cash forecast shows you money that is already spoken for, even if your bank balance looks healthy today.
Cleaner reporting for lenders and investors
Anyone reviewing your half-year or annual numbers expects costs to be matched to periods. Accounts with missing accruals can raise questions about how reliable the rest of your reporting is.
Smoother year-end
If you accrue properly each month, year-end close becomes a review rather than a rescue mission. Your accountant spends less time hunting for late bills, which can also keep their fees down.
Common mistake
Accruing a cost and then also entering the actual bill in the same month without reversing the accrual. The expense gets counted twice and profit looks lower than it is. If a month suddenly shows double utilities or double contractor costs, check for an unreversed accrual first.
A quick note: this article is general information about bookkeeping, not accounting or tax advice. Accounting rules and the methods you are allowed to use vary by country and business type, so check with a qualified accountant before you change how your books are kept.
Your accrued expenses action plan
- Confirm whether your books are kept on an accrual or cash basis
- Scan the last two months of payments for bills that arrived after the month they relate to
- Build a standing list of regular accruals: wages, utilities, interest, contractors
- Set a materiality line so you skip small items
- Create a monthly accruals tab using the template above
- Post accruals on the last day of the month and set them to auto-reverse
- Compare estimates with actual bills each month and refine your method
Frequently asked questions
Are accrued expenses an asset or a liability?
They are a liability. You owe money for something you have already received, so they appear under current liabilities on the balance sheet until you pay them.
Do I need accrued expenses if I use cash accounting?
Not in cash-basis books, because costs are recorded when you pay them. Many owners still keep accrual-based management reports to see true monthly profit. Ask your accountant which approach fits your filing requirements.
What if my estimate turns out to be wrong?
That is normal. If you reverse the accrual and then enter the real bill, the small difference simply lands in the following month. If your estimates are often far off, improve the method, for example by using timesheets or average bills.
How often should a small business record accruals?
Monthly is common if you produce monthly reports. Some very small businesses only accrue at quarter end or year end. The right rhythm depends on how often you look at your numbers and who relies on them.
Related reading
The bottom line
Accrued expenses are costs you have incurred but not yet paid, recorded as a liability so each month carries its own costs. Keep a short list of regular accruals, estimate sensibly, post them at month end and let them reverse automatically.
Start with your half-year close this July: catch the June bills that are still on their way, and you will see a truer picture of how the first half really went.
