Accrued Expenses: What They Are and How to Record Them
Accrued expenses are costs a company has incurred but not yet paid or been billed for, recorded as a liability. Here is what accrued expenses are, the journal entries, examples, and how they differ from accounts payable.
A company often incurs costs before any invoice arrives or any cash leaves the bank: employees work a pay period that straddles month-end, interest builds on a loan, utilities are consumed but not yet billed. Accrued expenses are how accrual accounting captures those costs in the right period, as a liability, rather than waiting for the bill. Getting them right is central to an accurate close.
This guide explains what accrued expenses are, why they exist, how to record them, common examples, and how they differ from accounts payable and prepaid expenses.
What are accrued expenses?
Accrued expenses (accrued liabilities) are expenses a company has incurred but not yet paid or been invoiced for as of the end of an accounting period. Under the matching principle, the expense belongs in the period the benefit was received, so the company records it with an adjusting entry and recognizes a corresponding liability until it is paid.
The matching principle drives accruals: expenses should be recognized in the same period as the revenue or activity that caused them, regardless of when cash is paid. Accrued expenses capture the costs that have happened but have not yet been billed or settled.
The journal entries
Recording an accrued expense takes two entries across periods. Say a company owes $10,000 in wages for days worked before month-end, to be paid next month.
At period-end (adjusting entry)
- Debit Wages Expense $10,000 (income statement)
- Credit Accrued Wages Payable $10,000 (liability)
When the expense is paid
- Debit Accrued Wages Payable $10,000 (clears the liability)
- Credit Cash $10,000
The first entry puts the expense in the correct period; the second settles the liability when cash is paid, with no further hit to the income statement. Some teams use reversing entries at the start of the next period to simplify the payment entry.
Common examples of accrued expenses
- Accrued wages and salaries for work done before period-end but paid in the next period.
- Accrued interest on loans that has built up but is not yet due.
- Accrued utilities consumed but not yet billed.
- Accrued taxes owed for the period but not yet paid.
- Accrued bonuses and commissions earned in the period but paid later.
- Services received (e.g., consulting) where the invoice has not yet arrived.
Accrued expenses vs. accounts payable vs. prepaid expenses
| Invoice received? | Cash paid? | Balance sheet | |
|---|---|---|---|
| Accrued expense | No | No | Liability |
| Accounts payable | Yes | No | Liability |
| Prepaid expense | Yes | Yes (in advance) | Asset |
The key distinction: accrued expenses are incurred but not yet invoiced (you estimate the amount), while accounts payable are costs you have been formally billed for and simply not yet paid. Prepaid expenses are the opposite, paid in advance and expensed later, the asset-side mirror of an accrual.
Why accrued expenses matter
- Accurate period results. Without accruals, expenses would land in the wrong period and overstate profit in the period the cost was incurred.
- A complete balance sheet. Accrued liabilities show the obligations a company has actually built up, not just the ones it has been billed for.
- Close accuracy and audit. Estimating and documenting accruals is a standard, scrutinized part of every close.
How AI agents automate accruals
Recurring accruals are a repetitive, rules-and-estimate close task: identify the expenses incurred but not billed, calculate the amounts from contracts and run-rates, draft the adjusting entries, and reverse them next period. An AI agent can handle that loop, pulling the supporting data, computing each accrual under your methodology, drafting the entries, and tying every figure back to source, while a human reviews the estimates and approves.
This is a core part of financial close automation: agents take the mechanical accrual work off the team so accountants focus on the judgment calls. See also closing entries for the period-end reset that follows.
Frequently asked questions
What are accrued expenses?
Accrued expenses are costs a company has incurred but not yet paid or been invoiced for by the end of an accounting period. They are recorded with an adjusting entry, debiting an expense and crediting an accrued liability, so the cost lands in the period it was incurred, per the matching principle.
Are accrued expenses a liability?
Yes. An accrued expense creates an accrued liability on the balance sheet, representing the obligation to pay for something already received. The liability is cleared when the expense is eventually paid.
What is the difference between accrued expenses and accounts payable?
Both are liabilities for unpaid costs, but accrued expenses are incurred and estimated before any invoice arrives, while accounts payable are costs you have been formally invoiced for and not yet paid. Accruals typically require estimation; payables are based on an actual bill.
What is the journal entry for an accrued expense?
At period-end, debit the relevant expense and credit an accrued liability (e.g., accrued wages payable). When the expense is later paid, debit the accrued liability and credit cash, clearing the obligation without affecting the income statement again.
The bottom line
Accrued expenses put costs in the period they belong to, even before the bill arrives, by recording an expense and a matching liability. They keep profit and the balance sheet accurate, and they are a recurring, estimate-driven part of every close, which makes them a natural fit for automation.
If you want recurring accruals calculated, booked, and reversed automatically each period, with every number traceable to source, talk to our team about AI agents for your close.
