Accrued Expenses

Accrued Expenses Definition

Accrued expenses are costs your business has incurred but hasn't paid for yet — and hasn't received a bill for either. They're different from accounts payable because with AP, you have an invoice in hand. With accrued expenses, you know the expense exists, but the bill hasn't arrived. They show up as current liabilities on your balance sheet.

Accrued Expenses in Practice — Example

You run a small e-commerce business with two employees. Their pay period ends on March 28th, but payday isn't until April 3rd. Those wages from March 28th through March 31st are accrued expenses — your employees earned the money in March, but you won't pay it until April. To keep your March books accurate, you record an adjusting entry debiting wage expense and crediting accrued wages (a liability). When you pay on April 3rd, you reverse the accrual.

Why Accrued Expenses Matters for Your Books

Accrued expenses ensure your financial statements reflect reality. Without them, your P&L understates expenses in the month they occur and overstates them in the month you pay. This distorts profitability and makes month-over-month comparisons meaningless.

This is especially important at year-end. If you incurred significant expenses in December but don't pay until January, failing to accrue them means your annual profit is overstated — and your taxes might be too. Proper accruals keep your tax reporting aligned with economic reality.

For businesses seeking loans or investment, clean accruals show financial sophistication. Bankers and investors want to see that your books reflect true obligations, not just what's been billed.

How Accrued Expenses Shows Up in QuickBooks

In QBO, accrued expenses are typically recorded via journal entries (New → Journal Entry). Debit the expense account and credit an accrued liability account (you may need to create one under Other Current Liabilities). At the start of the next period, reverse the entry. You'll see accrued expenses on the Balance Sheet report under Current Liabilities. QBO doesn't automate accruals, so this requires manual entries or a bookkeeper handling month-end close.

Common Mistakes

Skipping accruals for "small" amounts. Even small accrued expenses add up. If you're on accrual basis, consistency matters more than materiality for most small businesses.

Forgetting to reverse accruals. If you accrue an expense in March and don't reverse it in April when you pay, you'll double-count the expense.

Confusing accrued expenses with accounts payable. AP means you have a bill. Accrued expenses mean you don't have a bill yet but the cost is real.

FAQ

Q: What are common examples of accrued expenses? A: Wages earned but not yet paid, interest on loans between payment dates, utilities used but not yet billed, and taxes incurred but not yet due.

Q: Do I need to track accrued expenses on cash basis? A: No. Cash basis only records expenses when paid. Accrued expenses are an accrual-basis concept.

Related Terms

Accrual Basis

Adjusting Entry

Current Liabilities

Accounts Payable

Closing the Books

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