Accrued expenses

Accrued expenses are costs a business has already incurred but has not yet paid — and often has not yet received a bill for. Common examples are wages employees have earned but that haven’t been paid out, interest that has accumulated on a loan, or utilities used before the statement arrives. On accrual-basis books they are recorded as a current liability, because the obligation exists even though no cash has moved.

They are recorded through adjusting entries at the end of a period: an expense is posted to the profit and loss statement and a matching liability to the balance sheet. When the bill is later paid, the liability clears. This keeps each period’s expenses matched to the period that actually consumed them.

Without accruals, a month can look more profitable than it really was simply because a bill hasn’t arrived yet. Accruing the cost when it’s incurred — not when it’s paid — is the heart of accrual-basis accounting and what makes period-to-period comparison trustworthy.

Missing or stale accruals are a common finding in a cleanup: an accrued liability that was booked and never reversed, or a recurring cost that was never accrued at all, quietly distorts both the expense reports and the liability balance until it’s corrected.

They’re close but not the same. Accounts payable is money you owe against a bill you have actually received from a vendor. An accrued expense is a cost you’ve incurred but for which no bill has arrived yet — so you estimate and record it to keep the period accurate. Once the invoice comes in, the accrual is typically reversed and the amount moves to accounts payable.