Accrued Expense

Under accrual accounting, expenses belong in the period when they are incurred, not when they are paid. If a cost has been incurred but the bill has not arrived or been paid, it is recorded as an accrued expense, with a matching liability on the balance sheet.

Common examples include wages earned by staff in the last days of a month but paid in the next month, interest on a loan that has built up since the last payment, and utilities used during the month but billed later.

Suppose employees earn 3,000 of wages between 26 and 31 December, to be paid on 5 January. At year-end, the company records 3,000 of wage expense for December and 3,000 of accrued wages as a current liability. When the wages are paid in January, the liability is cleared.

Without accrued expenses, a period's costs would be understated and its profit overstated. Accrued expenses are usually recorded through adjusting entries at the end of each period.