Accrued expenses
Also known as: accrued liabilities, accruals
Accrued expenses are costs a business has incurred during an accounting period but has not yet paid or been billed for. They are recorded as a current liability so the expense appears in the period it relates to.
Accrued expenses are costs that a business has already incurred — the goods or services have been consumed — but for which no payment has been made and often no invoice has yet arrived. Common examples include wages earned by employees before payday, utilities used before the bill arrives, and interest that has built up on a loan but is not yet due.
Accruals exist because of the accruals (matching) concept: expenses must be recognized in the period they are incurred, not the period they happen to be paid. At the end of the period, the accountant makes an adjusting entry that debits the relevant expense account and credits an accrued expenses (accrued liabilities) account, which appears under current liabilities on the statement of financial position.
A quick example: a company's year ends December 31, and it receives a $3,000 electricity bill in January covering November through January. Roughly $2,000 of that usage belongs to the year just ended, so the company accrues $2,000 — increasing the expense in the profit or loss statement and showing a $2,000 liability at year end. When the bill is paid, the accrual is reversed and the cash payment settles the obligation.
Accrued expenses are the mirror image of prepayments, where cash is paid before the expense is incurred. The distinction is heavily tested on the ACCA Financial Accounting (FA) exam, where candidates must prepare the adjusting entries, calculate the expense to report for the period, and show the correct liability in statement-of-financial-position questions.
Key takeaways
- Accrued expenses are incurred-but-unpaid costs, recorded as a current liability at period end.
- They apply the accruals (matching) concept: recognize expenses when incurred, not when paid.
- The adjusting entry debits the expense account and credits accrued expenses (accrued liabilities).
- Accruals are the opposite of prepayments, where payment comes before the expense is incurred.
- ACCA FA exam questions test the adjusting entries and the resulting figures in the financial statements.