ACCRUED EXPENSES: Matching Principle, Reversals, Payroll
- Graziano Stefanelli
- 3 days ago
- 2 min read
Accrued expenses represent costs that have been incurred but not yet paid or invoiced. They ensure that expenses are recorded in the period in which they are incurred, even if the payment occurs later.
1. What Are Accrued Expenses?
Accrued expenses are liabilities for goods or services received that have not yet been invoiced or paid. They follow the accrual basis of accounting, ensuring expenses match the period they relate to.
Common examples:
Salaries and wages
Utilities
Interest payable
Professional services
Taxes incurred but unpaid
2. Journal Entry for Accrual
At period-end, companies record estimated unpaid expenses:
debit Expense
credit Accrued Liabilities (or Accrued Expenses Payable)
Example:
A company estimates $6,000 in unpaid wages for the last 3 working days of December:
debit Salaries Expense ....................................... 6,000
credit Accrued Salaries Payable ........................ 6,000
This matches payroll expense to the correct period even if payday is in January.
3. Reversal of Accruals
In the following period, the entry is reversed before recording the actual payment:
debit Accrued Expenses Payable
credit Expense
When the invoice or payroll is paid:
debit Expense (if not reversed) or Accrued Payable
credit Cash
Reversals prevent double-counting of expenses and simplify matching.
4. Accrued Payroll Example
Scenario:
December 28–31 wages remain unpaid. January 5 payroll includes 8 working days.
Total payroll: $16,000 (8 days)
December share: $8,000 (4 days)
December 31 entry:
debit Salaries Expense ....................................... 8,000
credit Accrued Salaries ......................................... 8,000
January 5 payment entry (gross):
debit Accrued Salaries ......................................... 8,000
debit Salaries Expense ....................................... 8,000
credit Cash or Payroll Payables ........................ 16,000
5. Cutoff and Financial Statement Impact
Accruals are critical for correct period-end cutoff.Failure to accrue leads to understated:
Expenses
Liabilities
Income tax obligation (if expense is deductible)
Balance sheet:
Accrued expenses = current liabilities
Income statement:
Accrued expenses = matched to correct period
6. Common Accrued Expense Categories
Category | Typical Timing |
Salaries & wages | Payroll period end |
Utilities | Monthly service cutoff |
Interest | Accrues daily, paid monthly |
Legal/consulting fees | Services received, billed later |
Taxes | Incurred before remittance |
7. Disclosures
Material accrued liabilities should be disclosed if not apparent from line items. Some are included in “accrued liabilities,” others in “other current liabilities.”
Disclosures may include:
Nature of the expense
Estimation method
Timing of settlement
Key take-aways
Accrued expenses are recorded when incurred, even before billing or payment.
They ensure compliance with the matching principle in accrual accounting.
Reversals help avoid overstating expense in the following period.
Accurate accruals are essential for cutoffs, tax reporting, and financial integrity.
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