ACCRUED EXPENSES: Timing, Adjusting Entries, and Financial Reporting

Graziano Stefanelli
Jun 12
2 min read

Accrued expenses are liabilities for costs incurred but not yet paid or invoiced at the reporting date. They ensure expenses are recognized in the correct period, aligning with the accrual basis of accounting.

1. What Are Accrued Expenses?

Accrued expenses are obligations that arise when a company receives goods or services but hasn’t yet paid or been billed for them.

These include:

Salaries earned by employees but unpaid at month-end
Utilities used but not yet invoiced
Professional services rendered but not yet billed
Interest incurred but not paid

They are classified as current liabilities and reversed when payment occurs.

2. Purpose and Accounting Principle

Accrued expenses reflect the matching principle, ensuring expenses are recorded in the period in which they are incurred, not when cash is disbursed.

They are also known as accrued liabilities and are distinct from accounts payable (which involve invoiced amounts).

3. Common Examples

Expense Type	Accrued When...
Wages	Work has been performed but payroll not processed
Utilities	Electricity used, invoice not yet received
Interest on loans	Loan term continues, next interest payment pending
Legal/accounting fees	Services rendered but invoice pending
Taxes	Liability accrues before formal tax assessment

4. Journal Entries for Accrual

At period-end (to accrue):

debit Expense Account
credit Accrued Expenses (liability)

Example:

€3,000 of salaries earned by Dec 31 but payable Jan 5:

debit Salaries Expense ........................................ 3,000
credit Accrued Salaries Payable .......................... 3,000

When paid in following period:

debit Accrued Salaries Payable .......................... 3,000
credit Cash ............................................................ 3,000

5. Accrual vs Payable vs Prepaid

Type	Timing	Entry Example
Accrued Expense	Expense incurred, not yet paid	Debit Expense, Credit Accrued Liability
Accounts Payable	Invoice received but unpaid	Debit Expense/Asset, Credit A/P
Prepaid Expense	Cash paid, benefit in future	Debit Prepaid Asset, Credit Cash

6. Monthly Close and Adjusting Entries

At each period-end, companies must:

Estimate expenses incurred but unpaid
Record adjusting entries
Reverse accruals in next period (if needed)

This ensures cut-off accuracy and compliant financial reporting.

Examples of estimates:

Utility bills based on meter readings
Legal fees based on hours worked to date
Bonus or commission accruals tied to sales targets

7. Financial Statement Presentation

Balance Sheet:
- Accrued expenses shown under current liabilities, often in “Accrued Liabilities” or “Other Current Liabilities”
Income Statement:
- Related expense appears in correct reporting period
Cash Flow Statement:
- Cash impact occurs only when payment is made (in a later period)

8. Internal Controls and Best Practices

Effective accrual accounting requires:

Clear cut-off procedures
Reliable estimation techniques
Reconciliation of accrual reversals
Documentation of judgments and assumptions used

Automated accrual tools can improve consistency and reduce closing errors.

Key take-aways

Accrued expenses align expense recognition with the actual period of occurrence.
They represent obligations that have not yet been invoiced or paid.
Proper journal entries and reversals ensure accurate financial reporting.
Monitoring and estimating accruals is essential for clean month-end and year-end closes.

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