Accrued Expenses: What They Are and Why They Matter

What Are Accrued Expenses?

An accrued expense is a cost your business has already incurred but hasn’t paid or been invoiced for yet. You record it at the end of an accounting period with an adjusting journal entry that debits an expense account and credits an accrued liability.

Because you owe money for something already received, an accrued expense is a liability. It stays on your books until the cash actually goes out.

Three plain facts make the idea click:

• Incurred, not yet paid. The benefit is already used up. The bill simply hasn’t shown up or come due. The Corporate Finance Institute defines accrued expenses as costs a company has already incurred but hasn’t paid for because the invoice hasn’t arrived.
• Booked with an adjusting entry. At period close you debit the expense and credit an account usually labeled Accrued Expenses or Accrued Liabilities. Per AccountingTools, accrued expenses are recorded by debiting the related expense account and crediting a liability account.
• Different from accounts payable. This is the distinction owners trip over most. Accounts payable means an invoice has arrived and you know the exact amount and due date. An accrued expense is booked before any invoice, so the amount is often a reasonable estimate. Our guide to accounts payable vs. accounts receivable walks through where each one lives.

Put simply, accrued expenses are triggered by time passing or a benefit being consumed, like interest building daily or staff working the final week of the month. Accounts payable is triggered by a vendor invoice landing in your inbox. Same money owed, a different moment of recording. The estimate doesn’t have to be exact, either. It has to be reasonable and consistent, because the precise amount catches up the moment the real invoice arrives.

Why Accrued Expenses Matter

Accrued expenses matter because they keep your profit honest. Record costs only when cash leaves the account, and a month where you used electricity, paid staff late, and racked up loan interest looks more profitable than it really was. Accruals close that gap.

Here’s what’s actually at stake.

• The matching principle. GAAP’s matching principle requires expenses to land in the same period as the revenue they helped produce, no matter when the cash moves. Accrued expenses are how you honor it.
• Honest profit. Skip an accrual and this period’s profit is inflated while next period’s is understated. Both numbers are wrong. If you price, hire, or take a distribution off that P&L, you’re deciding on bad data.
• A true picture of what you owe. Accruals surface money you already owe. That matters the moment a lender, an investor, or a buyer looks at your numbers.

Picture a founder who books rent only when the check clears. Move offices mid-quarter, delay the first payment, and one month reads lean while the next reads bloated. Neither number reflects how the business actually ran.

This is where owners running cash-basis books in a spreadsheet tend to slip. The accruals a trained set of eyes catches at month-end are exactly the ones a busy founder forgets. Indinero’s CPA-led accounting team records them every close, so your monthly financials reflect what the business actually earned and what it actually owes. Cash in the bank tells you what you have. Accruals tell you what’s already spoken for.

How Accrual Accounting Works

Accrual accounting records revenue when it’s earned and expenses when they’re incurred, regardless of when the cash moves. Cash-basis accounting does the reverse, counting income only when money arrives and expenses only when they’re paid. Accrued expenses exist only under the accrual method. If you want the full side-by-side, see our breakdown of cash vs. accrual accounting.

The clearest authority here is the IRS. Per IRS Publication 538, the cash method reports income in the year you receive it and deducts expenses in the year you pay them. The accrual method reports income in the year you earn it and deducts expenses in the year you incur them, no matter when payment happens.

Two accrual tests are worth knowing in plain English, both from Publication 538:

• All-events test. You can deduct an expense once all events have occurred that fix the liability and the amount can be figured with reasonable accuracy.
• Economic performance. For most costs, this happens as the goods or services are provided. Supplies received in December are deductible in December even if you pay in January.

Both tests point at the same idea. You record the cost when the obligation is real, not when the money moves.

Small businesses can often use the cash method for taxes, but larger ones must switch to accrual. A business generally has to use an accrual method once it passes the IRC Section 448(c) gross receipts test, an inflation-adjusted threshold that reached roughly $31 million in average annual gross receipts for 2025 and $32 million for 2026. For a growing company, switching from cash to accrual later means restating prior periods, so many founders start on accrual and never look back. Even below the threshold, most growth-stage companies keep accrual books, because that’s what investors and lenders expect to see. Most accounting software can run either method. Accrual is the one that produces financials a bank or a board will actually accept.

Common Examples in Small Business

The fastest way to make accrued expenses concrete is a short list of the ones almost every small business hits. In each case the pattern is identical: debit the expense, credit the accrued liability.

• Accrued wages. Staff earn wages in one period but get paid in the next. If your team worked the last week of March and payday is in April, you accrue March’s wages in March. Debit Wages Expense, credit Accrued Wages Payable.
• Accrued interest. Interest on a loan or line of credit builds daily even if you only pay quarterly or once a year. Debit Interest Expense, credit Accrued Interest Payable.
• Accrued utilities. You use electricity, gas, water, and internet all month, but the bill lands after the month closes. Debit Utilities Expense, credit Accrued Liabilities.
• Accrued taxes. Property, payroll, or income taxes owed for the period but not yet remitted. Debit Tax Expense, credit Accrued Taxes Payable.
• Unbilled professional services. A consultant, attorney, or contractor did the work but hasn’t invoiced yet. AccountingTools uses the classic case of an expected $500 supplies bill: debit the expense $500 and credit the accrued liability $500 at close.

Some of these recur every single month, so many businesses set up standing accrual entries and adjust the amounts as they change. Notice what every entry shares. An expense rises on the income statement, and a matching liability rises on the balance sheet, in the very same period.

Here’s the whole cycle in one example. You use $1,200 of electricity in June, but the bill won’t arrive until July. On June 30 you debit Utilities Expense $1,200 and credit Accrued Expenses $1,200, so June carries its own cost. When you pay the bill in July, the accrued liability clears and cash goes down. June’s P&L stays accurate, and July isn’t double-charged. Clean books, no guesswork.

How They Appear on the Balance Sheet

Accrued expenses show up on the balance sheet as accrued liabilities, grouped under current liabilities because they’re almost always due within a year. They sit on their own line or bundled into a single Accrued Liabilities figure.

• Current liability placement. Per AccountingTools, when the settlement period is within the next year, the liability tied to an accrued expense is presented on the balance sheet as a current liability.
• Two statements, one entry. The debit hit your income statement as an expense. The credit hit your balance sheet as a liability. One adjusting entry keeps both statements accurate at the same time. If tying statements together is new to you, our rundown of accounting formulas every business should know is a useful companion.
• Reversing entries. Many bookkeepers reverse an accrual on the first day of the new period so the real invoice can be booked normally without double-counting. AccountingCoach explains that the reversing entry removes the liability and leaves a temporary credit in the expense account that disappears when the actual invoice arrives, so the cost is reported only once.

That reversing step is why an accrual estimate self-corrects. You book a reasonable number at month-end, and the exact figure trues up as soon as the invoice posts. Owners sometimes worry an estimate makes the books look softer. The opposite is true. A booked accrual that trues up next month is far more accurate than a cost that vanishes from the P&L entirely until a bill happens to land. It’s one of the routine moves in a disciplined month-end close, not an accounting sleight of hand.

Why Investors and Lenders Care

Investors, lenders, and buyers care about accrued expenses because they reveal the real obligations of a business, not just the ones that happen to be paid. Leave accruals off and your financials understate what you owe, which is exactly the surprise that sinks a loan or a deal.

• Due diligence. In any financing round or sale, GAAP-compliant financials are the baseline. Buyers and investors want to see what revenue was earned, what liabilities exist, and what obligations remain. Accrued liabilities are part of that true position.
• Lending. Lenders read your financials to size up risk, which drives whether you get financing and on what terms. Understated liabilities distort the debt-to-equity and working-capital ratios banks underwrite against.
• Audits. Auditors specifically test for unrecorded or understated accrued liabilities, the completeness of what you owe. Books with the accruals already in place make the audit faster and cheaper.

A clean set of accrued liabilities signals something quieter too. It tells a buyer the business tracks reality, not just its bank balance. The advantage compounds, because books maintained this way month after month mean nothing has to be reconstructed under deadline pressure when a term sheet is on the table.

This is the payoff of booking accruals every month instead of scrambling before a raise. When a lender, investor, or acquirer asks, the numbers already hold up. Indinero pairs CPA-led accounting services with online bookkeeping, business tax, and fractional CFO advisory in one engagement, so your accruals are recorded correctly and your financials are audit-ready when outside scrutiny arrives. Continuous operations since 2009, 500+ regular customers, and SOC 2 compliant (2026). Your books shouldn’t stall the deal.

Frequently asked questions

Here are the questions small-business owners ask most often about accrued expenses.

What’s the difference between an accrued expense and accounts payable?

An accrued expense is a cost you’ve incurred but not yet been invoiced for, while accounts payable has an invoice already in hand. Accrued expenses come from time passing or a benefit consumed, like wages or interest, so the amount is often a reasonable estimate. Accounts payable is triggered by a vendor invoice with an exact amount and due date. Indinero’s CPA-led accounting team books both correctly at every month-end close.

Is an accrued expense a liability or an expense?

An accrued expense is both, it records an expense on your income statement and a matching liability on your balance sheet in the same period. One adjusting entry handles both, debiting the expense account and crediting an accrued liability, so your profit and what you owe stay accurate together. That liability sits under current liabilities until the cash goes out. Indinero books these every close.

How do you record an accrued expense with a journal entry?

To record an accrued expense, make an adjusting journal entry at period close that debits the expense account and credits an accrued liability. For example, if you used $1,200 of electricity in June but the bill lands in July, you debit Utilities Expense $1,200 and credit Accrued Expenses $1,200 on June 30. When you pay in July, the liability clears and cash goes down. Indinero’s team posts these entries each month so your books stay clean.

What’s the difference between an accrued expense and a prepaid expense?

An accrued expense is incurred but not yet paid, while a prepaid expense is paid but not yet used. They sit on opposite sides of the balance sheet, an accrued expense is a liability you still owe, like wages earned, and a prepaid expense is an asset you’ve paid for, like insurance covering months ahead. Indinero’s CPA-led team tracks both so each cost lands in the right period.

Do cash-basis businesses need to record accrued expenses?

No, cash-basis businesses don’t record accrued expenses, they book costs only when the money actually leaves the account. Accrued expenses exist only under accrual accounting. Many small businesses use the cash method for taxes, but a company generally must switch to accrual once it passes the IRS gross receipts test, roughly $31 million for 2025. Indinero handles either method and keeps growth-stage companies on accrual books that investors and lenders expect.

What happens to an accrued expense when the invoice finally arrives?

When the invoice arrives, the accrued liability clears and the actual bill gets recorded, so the cost is counted only once. Many bookkeepers post a reversing entry on the first day of the new period, which removes the accrued liability and lets the real invoice be booked normally. If your estimate differed slightly from the final amount, the difference trues up automatically. Indinero’s team runs this routine every close, so estimates self-correct and nothing gets double-counted.