Guide

Accrued expenses: What they are and how to record them

Learn what accrued expenses are, see real examples, and find out how to record them step by step.

Written by Michelle Ives—Content Writer, Communications Strategist, and former Product & Tech Writer at Xero. Read Michelle's full bio

Published Friday 3 July 2026

Key takeaways

Accrued expenses are costs your business has incurred but hasn't yet paid or received an invoice for, and they're recorded as current liabilities on your balance sheet to match expenses to the period when you actually used the goods or services.
Recording accruals each month gives you a more accurate picture of your profit and helps you see what cash obligations are coming due, even before the invoices arrive.
The standard accrued expenses journal entry debits the expense account and credits an accrued liability account, then you reverse that entry at the start of the next period so the actual bill can be recorded cleanly when it arrives.
Common accrued expenses examples include wages earned but not yet paid, interest accumulating on loans, utilities used before billing, taxes owed but not remitted, and professional services received before invoicing.

What are accrued expenses?

Accrued expenses are costs you've incurred in your business but haven't paid yet or received an invoice for. They represent money you owe for goods or services you've already used or consumed during an accounting period.

In accounting, accrued expenses are also called accrued liabilities because they're obligations your business must settle in the near future. You record them as current liabilities on your balance sheet while recognizing the related cost on your income statement.

The accrued meaning in accounting refers to the practice of recognizing transactions when they occur, not when cash changes hands. This is the foundation of accrual accounting and the matching principle, which requires you to record expenses in the same period as the revenue they help generate or the period when you receive the benefit.

For example, if your team works the last week of March but you don't process payroll until early April, those wages are an accrued expense in March. You benefited from the work in March, so you match the cost to March's financial results, even though the cash won't leave your account until April.

Recording accrued expenses ensures your financial statements reflect your true obligations and give you a realistic view of profitability and cash needs at any point in time.

What are accrued liabilities?

Accrued liabilities is another term for accrued expenses. The two are used interchangeably in most accounting contexts. Both refer to costs your business has incurred but not yet paid, recorded as current liabilities on your balance sheet.

Some businesses and accounting systems use "accrued liabilities" as the account name on the balance sheet and "accrued expenses" when referring to the underlying costs on the income statement. In simple terms, it’s more about how it’s shown than what it actually means.

Examples of accrued expenses

Accrued expenses show up in many areas of your business. Here are the most common categories to watch for at month-end:

Accrued wages and salaries: Any pay your employees have earned but not yet received, including unpaid days at the end of a pay period, overtime hours, or bonuses that have been earned but not yet paid out.
Payroll taxes: Employer-side payroll taxes (Social Security, Medicare, unemployment) that you owe based on wages earned but haven't yet remitted to the Internal Revenue Service (IRS) or state agencies.
Interest expense: Interest that has accumulated on loans, lines of credit, or other debt since the last payment date, even if the next payment isn't due until the following period.
Utilities: Electricity, gas, water, internet, and phone services you've used during the month but haven't been billed for yet because the billing cycle doesn't align with your accounting period.
Property and income taxes: Taxes that build over time, such as quarterly estimated income tax or annual property tax, where the liability builds each month even though you pay in installments or lump sums.
Professional services: Legal fees, audit work, consulting, or advisory services you've received but the invoice hasn't arrived by month-end.
Inventory or supplies received without an invoice: Goods your supplier has delivered and you've put into use, but the bill hasn't been processed or received yet.

Scanning for these categories at the end of each accounting period helps you capture the full cost of running your business in the right month, giving you a clearer picture of profitability and upcoming cash flow.

Accrued expenses vs accounts payable vs prepaid expenses

Understanding the differences between accrued expenses, accounts payable, and prepaid expenses helps you code transactions correctly and keep your financial reports clean and accurate.

Accrued expenses vs accounts payable

Both accrued expenses and accounts payable are short-term liabilities, but they differ in timing and documentation.

Accrued expenses are costs you've incurred but haven't been invoiced for yet. You estimate the amount and record it to match the expense to the correct period.
Accounts payable are amounts you owe for invoices you've already received. The supplier has billed you, and you know the exact amount and due date.

For example, if you receive legal advice in March but the invoice doesn't arrive until April, you record an accrued expense in March. Once the invoice arrives in April, you reverse the accrual and record the bill in accounts payable.

Accrued expenses vs prepaid expenses

Accrued expenses and prepaid expenses sit on opposite sides of the balance sheet because they represent different timing scenarios.

Accrued expenses are liabilities for costs you've incurred but not yet paid.
Prepaid expenses are assets representing costs you've paid in advance for services you'll receive in the future, such as insurance premiums or annual software subscriptions.

Accrued expenses increase your liabilities and expenses in the current period. Prepaid expenses increase your assets now and gradually become expenses as you use the service over time.

Accrual vs cash basis accounting

Accrued expenses only apply when you use accrual accounting. On the accrual basis, you record revenue when earned and expenses when incurred, regardless of when cash moves.

On the cash basis, you record transactions only when cash changes hands. You wouldn't record accrued expenses at all because you wait until you actually pay the bill.

Most businesses with inventory, employees, or complex operations use accrual accounting because it gives a more accurate picture of financial performance and obligations at any point in time.

How do you record accrued expenses?

Recording accrued expenses follows a standard process that ensures your financial statements reflect costs in the correct period, even when invoices arrive late or payments are delayed.

The goal is to estimate the expense you've incurred up to the end of the accounting period, post an adjusting entry to capture it, and then reverse that entry in the next period so the actual invoice can be recorded cleanly.

How to calculate an accrued expense

Before you post a journal entry, you need to estimate the amount you've incurred. The basic formula is:

Accrued expense = Daily or hourly rate × Number of days or hours incurred in the period

For example, if you pay employees $5,000 per week and three days of a five-day work week fall in March before the period closes, your accrued wages for March are $3,000 ($5,000 ÷ 5 × 3). Use the same rate-times-time approach for interest, utilities, or any other expense where you know the rate but haven't yet received the invoice.

The accrued expenses journal entry

The core accrued expenses journal entry involves two accounts:

Debit the appropriate expense account (wages expense, interest expense or utilities expense) to recognize the cost in the current period.
Credit an accrued expenses or accrued liabilities account (a current liability) to show the obligation you now owe.

This entry increases both your expenses (reducing profit) and your liabilities (increasing what you owe), giving a more accurate snapshot of your financial position at month-end.

When the next period begins, you reverse the entry by debiting the accrued liability and crediting the expense. This clears the accrual so that when the actual invoice arrives, you can record it in accounts payable as you normally would, without double-counting the expense.

Steps to record and reverse accrued expenses

Here's the sequence to follow at month-end and into the next period:

Gather details. Identify the service period, rates, quantities, or hours involved. Collect supporting documents such as contracts, emails, timesheets, or usage data to back up your estimate.
Estimate or prorate the amount. Calculate how much expense you've incurred up to the end of the period. For example, if employees worked three days in March that fall into the next pay period, calculate those wages. If your internet bill covers the 15th of one month to the 14th of the next, prorate the cost to match your accounting month.
Post the accrued expenses journal entry. Debit the relevant expense account and credit accrued expenses (or accrued liabilities). For example, for accrued wages you debit Wages Expense and credit Accrued Wages; for accrued interest you debit Interest Expense and credit Accrued Interest Payable; for accrued utilities you debit Utilities Expense and credit Accrued Utilities.
Attach documentation. Save your calculations, emails, or worksheets with the journal entry so you or your accountant can review the estimate during audits or month-end close reviews.
Set an auto-reversal. On the first day of the next accounting period, reverse the accrual entry. This means you debit the accrued liability account and credit the expense account, clearing the balance.
Record the invoice when it arrives. When the supplier's bill or payroll run comes through, enter it into accounts payable or process the payment as usual. Because you reversed the accrual, the expense now hits the correct period without duplication.

Is accrued expense a liability and a credit on recognition?

Yes. When you first recognize an accrued expense, you credit a liability account (accrued expenses or accrued liabilities), which increases your liabilities on the balance sheet. The debit goes to the expense account, which reduces your net income for the period.

When you reverse the entry in the next period, you debit the liability (reducing it back to zero) and credit the expense (which offsets the expense in the new period). Then the actual invoice gets recorded, and the expense appears in the period when the invoice is dated or paid, depending on your workflow.

This process keeps your financial statements accurate month to month and ensures your profit and loss reflects the true cost of doing business in each period.

Where do accrued expenses appear on financial statements?

Accrued expenses flow through your financial statements in a way that connects your obligations, your profitability, and your cash position. Here's how they show up on each statement:

Balance sheet

On the balance sheet, you record accrued expenses under current liabilities, often in an account labeled "Accrued Expenses" or "Accrued Liabilities."

This placement shows that you owe money for goods or services already received, and you expect to settle the obligation within the next 12 months. It increases your total liabilities, which reduces your equity when you subtract liabilities from assets.

Income statement

The related expense appears on your income statement in the period when you incurred the cost, not when you paid it.

For example, if you accrue wages at the end of March, those wages reduce March's net income even though you won't pay them until April. This matches the cost to the period when your employees did the work, giving you a more accurate view of profitability for March.

Cash flow statement

On the cash flow statement, accrued expenses are treated as a non-cash adjustment in the operating activities section.

When you record an accrued expense, you increase expenses (reducing net income) but no cash has left the business yet. So you add back the increase in accrued liabilities to reconcile net income to cash flow from operations.

Later, when you actually pay the bill, cash decreases and the liability clears. The cash outflow appears in the period when you make the payment, not when you first accrued the expense.

Cleanup in the next period

The reversal entry at the start of the next period clears the accrued liability from your balance sheet. When the actual invoice arrives, you record it in accounts payable as usual, and the expense hits the income statement in the new period (or gets offset by the reversal if you're using auto-reversing entries).

This keeps your financial statements clean and ensures you don't double-count expenses or liabilities across periods.

Why do accrued expenses matter?

Recording accrued expenses each month gives you a more complete and accurate view of your business's financial health. This can be beneficial in a few ways:

See true profit

Matching expenses to the period when you actually use the goods or services shows you what it really cost to generate that period's revenue. Without accruals, your profit might look artificially high one month and low the next, depending on when invoices arrive or when you process payments.

Accruals smooth out these timing differences and give you a clearer picture of your margins and operating performance month to month.

Plan for cash needs

Accrued expenses highlight obligations you'll need to pay soon, even before the invoices land in your inbox. This helps you anticipate short-term cash outflows and avoid surprises when bills come due.

For example, if you accrue $5,000 in wages and $2,000 in utilities at month-end, you know you'll need at least $7,000 in cash in the next few weeks, even if those amounts aren't yet reflected in your accounts payable.

Speed up month-end close

Using standard accrual entries and reversals creates a repeatable process that reduces rework and guesswork each month. You can set up templates or auto-reversing journal entries in your accounting software, making the close faster and less prone to errors.

This consistency also makes it easier to compare results across periods and spot trends in your expenses.

Support compliance and accuracy

Keeping detailed documentation of your accruals – such as timesheets and contracts, as well as usage estimates – gives you a clear audit trail. This helps during tax prep, financial reviews, or if you ever face an audit from the IRS or other regulators.

Over time, tracking accruals also improves your forecasting accuracy because you're capturing the full cost of operations in each period, not just the cash that moved.

Drawbacks of recording accrued expenses

Accrued expenses give you a more accurate financial picture, but they also add complexity to your bookkeeping. These are the main limitations to be aware of before you build accruals into your month-end process.

Estimating amounts: You base accruals on your best estimate rather than a confirmed invoice. If the actual bill is different, you simply adjust the entry so your records stay accurate.
Extra admin at month-end: Recording accruals requires you to review outstanding obligations, gather supporting data, and post additional journal entries before you can close the books. This adds time and effort compared to cash-basis bookkeeping.
Reversal errors: If you forget to reverse an accrual at the start of the next period, you risk double-counting the expense when the actual invoice arrives. This can distort your profit figures and require doubling up on work to fix the entry.
Not always necessary for very small businesses: If your business is small, cash-basis, and has few timing differences between when you incur and pay expenses, the benefit of accruals may not justify the added complexity. Talk to your accountant about whether accrual accounting makes sense for your situation.

Streamline accruals and month-end close with Xero

Managing accrued expenses, posting adjusting entries, and tracking reversals can quickly get complicated as your business grows. Xero simplifies these tasks by centralizing your accounting and giving you tools to record, track, and reverse accruals with less manual work - and you can even get one month free to see how it fits your workflow.

With Xero, you can create detailed journal entries for accrued wages, interest, utilities, and other expenses, then set them to auto-reverse at the start of the next period. You can learn more about journal entries in this Xero guide on journal entries. This keeps your financial statements accurate month to month and reduces the risk of double-counting or missing expenses.

Xero also connects to your bank feeds, invoices, and bills, so you can see your true cash position alongside your accrued liabilities, making it easier to plan for upcoming payments and close your books faster each month.

FAQs on accrued expenses

Here are answers to some of the most common questions small business owners and bookkeepers ask about accrued expenses and how to handle them at month-end.

Is an accrued expense an asset or a liability?

An accrued expense is a liability, not an asset. It represents money you owe for goods or services you've already received but haven't paid for yet. On the balance sheet, you record it under current liabilities because you expect to settle the obligation within the next 12 months.

Are accrued expenses current liabilities?

Yes. Accrued expenses are classified as current liabilities because they're short-term obligations you'll typically pay within the next accounting period or within one year. Examples include accrued wages, accrued interest, and accrued utilities.

What is the journal entry for accrued wages?

To record accrued wages, you debit Wages Expense (or Salaries Expense) and credit Accrued Wages (or Accrued Payroll), a current liability account. This entry recognizes the cost of labor in the period when employees earned the wages, even if you haven't processed payroll yet.

At the start of the next period, you reverse the entry by debiting Accrued Wages and crediting Wages Expense. Then, when you run payroll, you record the payment as usual, and the expense appears in the new period without duplication.

How are accrued expenses different from accounts payable?

Accrued expenses are costs you've incurred but haven't been invoiced for yet, so you estimate the amount and record it to match the expense to the correct period. Accounts payable are amounts you owe for invoices you've already received, where the supplier has billed you and you know the exact amount and due date.

Both are current liabilities, but accrued expenses involve estimation and timing adjustments, while accounts payable are based on actual invoices.

Do you always reverse an accrual?

In most cases, yes. Reversing the accrual entry at the start of the next period clears the liability and prevents double-counting when the actual invoice arrives. This is standard practice for recurring accruals like wages, utilities, and interest.

However, if you're accruing a one-time expense and you know the exact amount and timing, you might choose not to reverse it and instead clear the accrual directly when you record the invoice. Always check with your accountant or follow your company's accounting policies to ensure consistency.

What happens if you forget to accrue an expense?

If you miss an accrual, your expenses for that period will be understated and your profit will look higher than it actually was. You can correct this in the next period by posting the entry when the invoice arrives, or by making a prior-period adjustment if the amount is significant Your accountant can advise on the right approach.

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