What Are Accrued Expenses? Definition and Examples

How accrued expenses and accrued liabilities fit together

An accrued expense and an accrued liability are two sides of the same entry. The expense side lands on your profit and loss statement (P&L), the report of income and costs for a period. The liability side lands on your balance sheet, the snapshot of what the business owns and owes on one date. Most charts of accounts, the list of accounts in your books, have a line called "Accrued expenses" or "Accrued liabilities."

The idea comes from accrual accounting, which records costs when they're incurred rather than when cash leaves. The OpenStax accounting textbook defines accrued expenses as expenses incurred in a period that haven't been recorded yet, with no money paid. Under the cash method, where a cost counts only when you pay it, accrued expenses don't exist.

Why businesses accrue expenses

Without accruals, each month's profit depends on when bills happen to arrive, not on when the work happened. A subcontractor who finishes in September and bills in October makes September look better than it was and October look worse.

On a contractor's books, leaving a $3,800 trenching cost off a job makes it look $3,800 more profitable than it is. A WIP report, the schedule that compares costs, earned revenue and billings on open jobs, will show that job's costs $3,800 too low, and its percent complete and billing position will be off with them.

Accruals are a standard entry in the month-end close, the routine of checking and finalizing the books after each month ends.

Common examples of accrued expenses

The usual ones:

• Wages earned since the last payday, plus the employer's payroll taxes on them
• Interest on a loan or line of credit that has built up since the last payment
• Subcontractor or vendor work that's finished but not yet billed
• Materials delivered with a packing slip but no invoice
• Electricity, water and gas used this month but billed next month

On an equipment loan with a $60,000 balance at 8% a year, a month of interest is $400 ($60,000 x 8% / 12).

How to record and reverse an accrued expense

A journal entry is the basic record in double-entry bookkeeping. Every entry has debits on the left and credits on the right, and the two totals must match. To accrue a cost, you debit an expense account, which raises the cost on the P&L, and credit an accrued liability account, which raises what you owe.

The monthly routine looks like this:

1. On the last day of the month, list the costs you've incurred with no bill yet.
2. Estimate each one from timesheets, quotes, purchase orders or recent bills, and note the source.
3. Post one journal entry dated the last day of the month.
4. Reverse it on the first day of the next month.
5. Record the real payroll or vendor bill the usual way when it comes in.

The reversal in step 4 is what stops the cost from being counted twice. It cancels the estimate, so when the actual bill goes into accounts payable, the list of vendor bills you owe, the new month carries only the difference. In QuickBooks Online, the Reverse option on a saved journal entry creates the opposite entry dated the first day of the following month.

Worked example: a plumbing company closes September

A plumbing company in Ohio has eight techs who each earn $35 an hour on 8-hour days, so the crew costs $2,240 a day ($35 x 8 hours x 8 techs). Payday is Friday, for that Monday-to-Friday week. September 30, 2026 is a Wednesday, so by month-end the crew has earned three days of wages, $6,720, that won't be paid until October 2.

The same week, an excavation sub finished trenching for a sewer line replacement. The quote was $3,800, and this sub usually bills two or three weeks later.

Each entry has $10,520 of debits and $10,520 of credits. The first puts $10,520 of cost into September. In the reversal, the debits lower the two liabilities and the credits lower the two costs, taking the $10,520 back out on October 1.

On October 2, payroll records the full week: $11,200 of field labor ($2,240 x 5 days). After the reversal's $6,720 credit, October keeps $4,480, the two days worked in October. This leaves out the employer's payroll taxes on those wages, which you accrue the same way. Tax withheld from pay is already inside the $11,200.

On October 14 the sub's bill arrives for $3,950, including a $150 dump fee nobody quoted, and goes into accounts payable. Net of the $3,800 reversal, October picks up $150. September carries the trenching, and October carries only the surprise.

Mistakes that throw off accrued expenses

Forgetting the reversal

If the October 1 reversal never posts, the $3,950 bill lands on top of the $3,800 accrual and the job shows $7,750 of trenching. The accrued expenses balance also sits at $3,800 for good. Each month, check that the accrual account holds only the new month's estimates.

Accruing a bill that's already entered

If the sub's bill had arrived and been entered on September 29, accruing it too would double the cost, so check the vendor's open bills first. The line between accrued expenses and accounts payable comes down to whether the bill exists.

Accruing costs that haven't happened yet

An accrual is for work already done or time already passed. Next month's rent and a deposit on an order that hasn't shipped are not accrued expenses.

Accrued expenses and your tax return

Tax deductions follow their own timing, set out in IRS Publication 538 (revised January 2022). If your business uses the cash method for taxes, you generally deduct expenses in the year you pay them, so a year-end accrual doesn't move the deduction.

Under the accrual method, where you deduct costs when you owe them rather than when you pay, two tests must be met. The all-events test: everything has happened that fixes the fact that you owe it, and the amount can be figured with reasonable accuracy. And economic performance, which for most purchases means the goods or services have been provided to you. Trenching finished in December passes both tests in December.

Some costs count as performed only when you pay them: workers' compensation, claims for injury or damage caused by the business (tort liabilities), insurance, rebates and refunds, and most taxes. So an insurance premium you owe on December 31 but pay in January generally counts in the year you pay it, unless the exception below applies. Interest works the other way: it counts as time passes, paid or not.

Amounts owed to a related person who uses the cash method aren't deductible until you pay them. Related persons include your spouse, parents, children and siblings if you're a sole proprietor, a shareholder who owns more than 50% of a corporation, and any owner of an S corporation or partnership.

A recurring-item exception lets you deduct certain items in the year the all-events test is met. It applies only if economic performance happens by the earlier of 8.5 months after year-end or your timely filed return (including extensions), you treat similar items the same way every year, and the item is either immaterial (small next to your income and expenses) or better matched to that year's income. It doesn't cover workers' compensation or tort liabilities.

The exception is also an accounting method: you can adopt it in the first year a type of cost comes up, and starting later generally takes IRS approval, requested on Form 3115. Your CPA can confirm how these rules apply to your business.

Keeping the accrual list short

Vendor accruals shrink when bills reach the books the day they arrive. With Clyr's bill pay and accounts payable tools, vendors email invoices straight into Clyr, approvals route by your rules and you pay by ACH bank transfer or check. Bills that came in during the month are then already in accounts payable, and the month-end estimates cover only work that hasn't been billed.

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