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What are Accrued Expenses?

Accrued expenses are costs a business has incurred but has not yet paid or recorded through an invoice by the end of an accounting period. Under accrual accounting they are recognised in the period the cost arises and recorded as a current liability, so the financial statements match expenses to the period they actually belong to.

The classic examples are wages earned by staff but not yet paid at month-end, utilities used but not yet billed, and interest that has built up on a loan since the last payment. Each is a real obligation that exists today even though no invoice or cash movement has happened yet. The bookkeeper records an accrued expense with a debit to the relevant expense account and a credit to a liability account.

Accrued expenses are the mirror image of deferred revenue: both exist to make the books reflect economic reality rather than cash timing. Without them, a business could look profitable in a month simply because it has not paid its bills yet. They are reversed in the following period once the actual invoice arrives or the cash is paid.

Example

A firm's staff earn €4,000 in wages in the last week of March, paid on 3 April. At 31 March the bookkeeper records €4,000 of accrued wages so March's profit statement includes the full cost of the work done in March.

Questions

What is the difference between accrued expenses and accounts payable?

Accounts payable are obligations backed by a supplier invoice already received. Accrued expenses are obligations incurred but not yet invoiced, such as wages earned or utilities consumed before the bill arrives. Both are current liabilities.

How are accrued expenses recorded?

With an adjusting entry that debits the expense account and credits an accrued liability account. When the invoice or payment arrives in the next period, the entry is reversed and the actual transaction is recorded normally.

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