Accrued expenses: Definition, examples, and journal entry

Accrued expenses are costs recognized in the month they're incurred, before the vendor bills you, with a debit to expense and a credit to a liability. Recognizing them on time keeps each month's costs in the month that used the goods or services.

• Accrued expenseA cost you've incurred, such as consulting work done in October, that hasn't been invoiced or paid at month-end
• Accrued liabilityThe balance sheet account that holds those unpaid costs, and another common name for accrued expenses
• AccrualThe month-end journal entry that records the expense and the liability

Accrued expenses are one of the two types of accruals. The other is accrued revenue, which records revenue you've earned but haven't billed.

An accrued expense is a liability, and because it's normally paid within a year, it's a current liability. Knowing where it sits tells you how to record it and where to look for it on the balance sheet.

Accrued expenses carry a credit balance and appear on the balance sheet under current liabilities, often as “accrued liabilities” or “accrued expenses.” The other side of the entry is an expense on the income statement, so an accrual lowers the month's profit and raises its liabilities by the same amount. Cash doesn't move until the bill is paid.

Typical accrued expenses at a mid-sized company include wages, usage-based services, and professional fees that cross a month-end before they're billed. Listing your recurring ones helps your team check each of them every month instead of relying on memory.

Payroll taxes, employee benefits, and paid time off are accrued on the same basis as the wages behind them.

The journal entry for an accrued expense debits the expense account and credits accrued liabilities at month-end. Following it through to the invoice shows how a reversal on day one keeps the cost from being counted twice.

October carries the $46,000 expense. In November, the reversal and the invoice net to zero, and the liability moves from accrued liabilities to accounts payable until you pay it. ERPs such as NetSuite let you set a reversal date on the original entry, so the November 1 entry posts automatically.

For payroll, prepaid, and other month-end entries, see Month-end journal entries: Examples and what to review.

Accrued expenses are costs you've incurred but haven't been billed for, while accounts payable are costs you've been billed for but haven't paid. Both are current liabilities, but the invoice changes how the amount is supported and where it's recorded.

Goods received but not invoiced sit between the two. If your ERP posts an accrual when a purchase order is received, that receipt already records the liability, so don't accrue it again by journal entry.

You estimate an accrued expense from the best evidence you have at month-end: the vendor's figure, a contract or PO rate, usage data, or recent bills. Finding the unbilled costs first matters as much as the math, because you can't estimate a cost you haven't found.

Look for unbilled costs in these places before you calculate anything:

• Open purchase ordersItems received or services delivered against a PO with no bill yet
• Contracts and retainersFixed monthly fees for agencies, software, and outsourced services
• Usage consolesCloud, data, and API providers that bill after the month
• Payroll calendarWorking days after the last payroll period already recorded, through month-end
• Budget ownersA short list sent to department heads asking what work was done but not billed
• Last month's look-backVendors that billed late last month will probably bill late again

Then record the basis next to each amount, so the reviewer can test it and next month's preparer can repeat it.

A single schedule for all accruals gives your reviewer one place to check the amounts, the basis, and the support.

Laptops received on October 29 against a $58,000 purchase order aren't on the schedule, because the ERP recorded them when the receipt was posted.

When the November invoices arrive, the team compares each one with its accrual:

The differences total $7,590 ($2,650 + $5,500 − $560), and they land in November's expenses. The legal accrual missed by 12%, so the basis changes, not just the number.

Reverse accruals that an invoice will replace, and true up accruals that build until they're paid. Choosing one method per accrual type keeps the balance easy to reconcile and avoids counting the same cost twice.

• ReverseRecurring estimates that an invoice replaces, such as hosting, utilities, and professional fees, reversed on day one so the invoice can be entered normally
• True upBalances that grow over several months, such as annual bonuses, paid time off, and the year-end audit fee, adjusted each month to the new estimate instead of reversed

Whichever you choose, the accrued liabilities balance at month-end should tie to the current schedule line by line.

No accounting standard sets a dollar threshold for booking an accrual, so your close policy has to set one. In Staff Accounting Bulletin No. 99 (1999), the SEC staff says that relying only on a percentage or numerical threshold to judge materiality “has no basis in the accounting literature or the law.”

A workable policy usually has three parts:

• A review threshold for one-off itemsFor example, accrue any single unbilled cost above a set amount
• An aggregate checkAdd up the small items you skipped, because many small omissions can add up to a material one
• Always-accrue categoriesPayroll, bonuses, interest, and other recurring costs, whatever their size

Agree the thresholds with your auditors before year-end, because their search for unrecorded liabilities uses their own threshold, not yours.

The mistakes to check for are accruals that never clear, costs counted twice, and costs missed entirely. Checking for each one before sign-off is cheaper than finding it in an audit.

• Stale accrualsLast month's schedule rolled forward without checking whether the bill was already paid
• Double countingAn accrual left in place when the invoice is expensed, or a journal accrual on top of a receipt accrual from the ERP
• Accruing what's already in APAn invoice entered before the cutoff and accrued again by journal entry
• Missed costsAccruals built only from invoices received, not from POs, contracts, and budget owners
• No supportRound numbers with no basis, which reviewers and auditors can't test
• Negative balancesA debit balance in accrued liabilities after close, which often means an invoice and a reversal cleared the same cost

Auditors test accruals by searching for unrecorded liabilities. They review payments and invoices from the weeks after month-end, check whether the goods or services were received before it, and compare earlier accruals with the invoices that followed.

For where accruals sit in the close, see Month-end close process. For each task with its owner and reviewer, see Month-end close checklist. If you're new to the close, start with What is month-end close?

Our Close Agent prepares accruals as tasks on your close checklist. It builds each accrual from the source records, attaches the workpaper, and drafts the journal entry with its reversal for a named approver. Nothing posts until that person approves it. If you want your month-end accruals prepared before your team starts on them, explore our Close Agent.