Accrued expenses: Definition, examples, & how to record them

More than half (52%) of small business owners report that poor financial management is holding them back. If you count yourself among them, it could be because you’re struggling to manage your accrued expenses effectively—a common source of accounting inaccuracies.

Let’s break down what you need to know to handle accrued expenses correctly, including what they are, why they matter to your business, and how to record them on your financial statements.

Jump to:

• What are accrued expenses?
• 3 key purposes of accruing expenses
• Real-world examples of accrued expenses
• How to record an accrued expense
• Common accrued expense misconceptions
• How to manage accrued expenses effectively
• The effects of implementing accrual accounting

What are accrued expenses?

Accrued expenses are expenses that have been accounted for but have not yet been billed. For instance, you’re likely using electricity to power some part of your business. Every month you account for an electric bill before you know exactly how much energy is being used. This is a form of accrual accounting. 

3 key purposes of accruing expenses

You have to accrue expenses if you follow the accrual basis, which is the most accurate approach to accounting. Let’s explore three of the underlying reasons why it’s necessary.

1. Matching principle

The matching principle is an accounting concept that says you should record expenses in the same period you record the revenues they help generate. This aligns the related aspects of your finances, resulting in a profit and loss (P&L) statement that better reflects your performance.

Example: If a member of your sales team earns a commission in June but gets paid in July, accruing the expense in June correctly matches it to the revenue it helped create.

2. Accurate financial reporting

Accruing expenses in the right accounting period helps you capture your business’s actual obligations, even if you haven’t received bills for them yet. It also prevents you from understating your expenses in that period and overstating them in the future.

This makes your financial statements more useful for you and your managers, as well as any external stakeholders who rely on them to assess your company’s strength, such as lenders and investors. 

3. Comparison to cash basis accounting

The cash basis of accounting involves recording income when it’s received and expenses when they’re paid. It stands in contrast with the accrual basis, which involves recording income when it’s earned and expenses when they’re incurred—no matter when cash actually changes hands.

The cash basis is much easier to implement, making it popular among small businesses and independent contractors. However, it’s also less accurate, especially as your operation grows in complexity.

As a result, many established companies use the accrual basis, especially those seeking external financing. In fact, all public companies use accrual accounting since they have to comply with GAAP, which doesn’t allow the cash basis.

Real-world examples of accrued expenses

Accrued expenses aren’t just theoretical. You’ll encounter them frequently if you use the accrual accounting basis. Here are some of the most common accruals that result from day-to-day business operations.

Salaries and wages payable

Unfortunately, payroll schedules don’t often align perfectly with accounting periods. When one ends sometime after the close of an accounting period, you have to accrue salaries and wages payable for those last few days.

Example: Imagine your next biweekly payroll goes out on January 4, 2026, while your current accounting period ends on December 31, 2025. You would accrue an expense for the salaries and wages you owe your employees at the end of the year.

You can use payroll software like QuickBooks Online Payroll to track time, provide team benefits, and complete payouts.

Accrued interest expense

Interest on business loans, lines of credit, and bonds accumulate continuously, even if you only make payments toward them quarterly or annually. As a result, you have to accrue that “unpaid” interest onto the books at the end of each accounting period.

Example: Say your business has a $100,000 loan with a 6% interest rate, paid quarterly. After the first month of the quarter, you would accrue an interest expense of $500 to reflect that month’s interest.

Accrued utility expenses

Businesses typically use utility services like electricity, water, and gas throughout a given period, but the bill often arrives after the period has ended. To match these expenses to the proper period, you should estimate and accrue the cost.

Example: Imagine your business uses electricity at an average rate of $800 per month based on historical costs. At year end, you haven’t received a bill for the last month and a half, so you accrue $1,200 in utilities payable.

Accrued taxes (e.g., property taxes, sales tax)

Taxes typically accumulate throughout the year, but only get paid quarterly or annually. As a result, you have to accrue a tax expense for accounting periods that end between payments.

Example: Say you owe $6,000 in property taxes each year, due in June. Each month, you should accrue $500 in property taxes to recognize the steadily increasing liability.

Accrued rent expense

If you pay your rent in arrears (i.e., after you use the facilities) or want to produce accurate financial statements for a date in the middle of a period, you may need to accrue rent expenses.

Example: Imagine you rent an office space for $4,000 each month, due on the fifth day of the month following each usage period. You wouldn’t pay for December’s rent until January 5, but you should accrue a $4,000 liability for rent expense at the end of the year.

How to record an accrued expense

If you’ve identified an expense that you’ll incur in the current period but not pay until after the period closes, here’s how to accrue it in accounting software like QuickBooks:

• At period-end: Make an adjusting journal entry. Debit the relevant Expense Account for the unpaid amount to recognize the cost. Credit the relevant Accrued Liability account to show your future obligation.
• After paying: Make another adjusting journal entry for the same amount. This time, debit the Accrued Liability account to clear the obligation and credit the Cash Account to reflect completion of the payment.

Common accrued expense misconceptions

Accrued expenses occur when work has been performed but no bill has been received. An accrual expense is recorded to offset the bill that is coming for next month but has occurred in the previous month.

Accrued expenses are sometimes confused with accounts payable and cash accounting, but they’re not the same. Let’s take a look at the differences between the three.

Accrued vs. cash accounting

Cash basis accounting is another method of accounting for accrued revenue and expenses. It involves paying and recording an expense only when a bill has been received. 

Note: Companies should not switch back and forth between accounting methods. Changing your accounting method can make for a messy audit when it comes to checking your books.

Accrued vs. accounts payable

Accounts payable is not an accounting practice—it’s part of an accounting process for accrual accounting methods. Accounts payable is a record of all the outstanding accounts that are due to be paid by the company. 

Since cash basis accounting only recognizes expenses when the invoice has been received, it has no use for accounts payable or accounts receivable.

How to manage accrued expenses effectively

Managing accrued expenses effectively is critical if you want to build accurate financial statements under the accrual basis. Here are some of the best ways to stay organized:

• Forecasting and planning: Anticipating recurring expenses, like payroll, utilities, and interest payments, makes it much easier to keep up with accruing them. Consider creating a calendar or a spreadsheet to help track everything.
• Robust record-keeping: Keep detailed documentation of any services received or periods covered that you haven’t been invoiced for yet, such as when working with subcontractors who bill in arrears. This will help inform your accrual estimates.
• Regular review and reconciliation: Check on your accrued liability accounts regularly, such as at the end of each month. In addition to clearing liabilities that have since been paid off, remember to reconcile your accrual estimates to the actual invoice amounts.
• Utilize accounting software: Tracking accrued expenses with accounting software is much more efficient than doing it by hand, potentially even allowing you to automate recurring accrual entries. You can also get expert help through services like QuickBooks Live.

The effects of implementing accrual accounting

Both cash basis and accrual accounting are legally recognized under GAAP (Generally Accepted Accounting Principles). It’s up to you to choose which method is best for your company. For some industries, accrual accounting is more popular than others, and vice versa. 

Whichever you decide to implement, you may find that you need some extra help. With the new Intuit AI Accounting Agent, you can now use QuickBooks accounting software to automate everyday tasks, including categorizing transactions and reconciling the books.