An accrued expense is a cost your company has incurred and has not yet been billed for or paid by the end of the month. Recording it puts the expense in the month the work or service happened, so that month’s profit is right, and records what you owe as a liability until the bill arrives.
The short answer
- Accrue a cost when the service has been received or the work done by month end, and no bill or payment has been recorded.
- Book it as a debit to the expense and a credit to accrued expenses, a liability on the balance sheet.
- Reverse it on the first day of the next month, and then record the real bill when it arrives. The two cancel, and only the difference remains.
- Estimate when you must, from the contract, the hours worked or the last few bills, and let the real bill true it up.
- Apply a threshold so you accrue what matters and skip the $40 items. Write the policy down.
Accrued expense, payable or prepaid?
Three balance sheet accounts sit around the timing of a cost. The difference is what has happened to the bill and the cash.
| Account | The service | The bill | The cash |
|---|---|---|---|
| Accrued expense | Received | Not recorded yet | Not paid |
| Accounts payable | Received | Recorded | Not paid |
| Prepaid expense | Not used yet | Recorded or not needed | Paid |
An accrued expense becomes an account payable when the bill is recorded. A prepaid expense is the reverse: cash went out first and the expense follows over the months of use. The prepaid expense amortization guide covers that side.
The accruals most companies book
- Wages and payroll taxes
- Pay earned in the last days of the month and paid in the next, plus the employer’s share of payroll taxes and benefits on it.
- Bonuses and commissions
- Earned during the month or quarter and paid later. Accrue the part earned so far.
- Vacation and paid time off
- Time employees have earned and not yet taken, where your policy and local law make it a payable obligation.
- Professional fees
- Legal, accounting and consulting work done in the month and invoiced after it.
- Contractors and freelancers
- Work delivered in the month, where the invoice comes later.
- Usage-based services
- Cloud hosting, telecom, shipping and similar services billed after the usage period.
- Utilities
- Electricity, gas and internet used in the month and billed in the next.
- Interest
- Interest on a loan or line of credit that has built up since the last payment.
- Commissions to partners and referral fees
- Owed on sales made in the month and paid after it.
A worked example: legal fees with a reversing entry
Your lawyer works 20 hours in January at $400 an hour, and the $8,000 invoice arrives on February 10. Without an accrual, January shows no legal cost and February shows $8,000 of it.
| Date | Entry | Legal expense that month |
|---|---|---|
| January 31 | Debit legal fees 8,000. Credit accrued expenses 8,000. | January: $8,000 |
| February 1 | Reversal: debit accrued expenses 8,000. Credit legal fees 8,000. | February: minus $8,000 |
| February 10 | Bill arrives: debit legal fees 8,000. Credit accounts payable 8,000. | February: plus $8,000 |
| Result | Accrued expenses back to zero, with the payable recorded | January $8,000, February $0 |
Reversing the accrual on the first of the month means nobody has to remember to remove it later. The bill is then entered the normal way, and the two entries net out.
A second example: wages at month end
A team earns $2,000 of wages a working day. The pay for the last three working days of the month is paid on the 3rd of the next month, so at month end $6,000 of wages are earned and unpaid. The accrual is a debit to wages expense and a credit to accrued expenses for $6,000, plus the employer’s payroll taxes and benefits on that amount. It reverses on the 1st, and the payroll on the 3rd records the full cost.
A third example: an estimate that gets trued up
Hosting is billed after the month. Your last three bills averaged $3,200, and the January bill is not in yet, so you accrue $3,200. The bill arrives for $3,350.
| January | February | |
|---|---|---|
| Accrual | $3,200 | |
| Reversal on February 1 | minus $3,200 | |
| Actual bill | $3,350 | |
| Total expense in the month | $3,200 | $150 |
The $150 difference lands in February as a small true-up, which is fine when the estimate is reasonable and the amounts are small. A large miss is worth investigating.
How to find what to accrue
- 1
List the vendors you pay every month
Compare the last three months of bills with this month. A vendor you usually pay that has no bill yet is a candidate.
- 2
Check engagements and contracts
Review open projects, retainers and statements of work for work delivered in the month and not yet invoiced.
- 3
Look at payroll and bonus dates
Find the last pay date and the days worked after it, then add commissions, bonuses and paid time off earned so far.
- 4
Calculate interest
Add the interest that has built up on loans and credit lines since the last payment.
- 5
Search the bills that arrive after month end
Read the bills dated in the next month, in the first couple of weeks, for services received in the closing month. This is the check an auditor runs for unrecorded liabilities.
- 6
Ask the people who buy things
Team leads know about work delivered or services used that has not been invoiced.
- 7
Post the accruals as reversing entries and tie them out
Enter each with its support, set it to reverse on the first of the next month, and check that the accrued expenses balance matches your list.
Date a bill by its service period
A bill dated February 10 for work done in January belongs in January. Many companies enter the bill with its service period, so the expense lands in the right month without a manual accrual. Accruals cover the cost before the bill exists, and service-period dating covers it once the bill arrives.
Why it matters
- Monthly profit is right. Without accruals, a month with a late bill looks better than it was, and the next month looks worse.
- The close is complete. Unrecorded liabilities are a standard question at audit and in diligence.
- Margins and burn are accurate. Both depend on costs landing in the month they belong.
- Cash planning is clearer. The accrued expenses balance is a list of what you owe soon.
Common mistakes
- Waiting for the bill before recording a cost, which pushes expenses into the wrong month.
- Forgetting to reverse an accrual, so the cost is counted twice when the bill arrives.
- Accruing without support, leaving no way to explain the number later.
- Accruing everything, including trivial amounts, and filling the close with noise.
- Missing payroll taxes and benefits when accruing wages.
- Leaving old accruals on the balance sheet long after the bills were paid.
How Numbrr handles it
On Numbrr One and above, the Accrued Expenses page keeps the accruals on your books, their reversals and their aging, and shows a month-end view for any month you choose. For each expected accrual it shows whether it is Accrued or Pending: for example, a vendor you usually pay whose bill has not arrived, or a recurring charge that has not appeared yet. Numbrr proposes the accruals and you approve each one, and an accrual can reverse automatically on the first of the next month. Bills can be dated by their service period. See how it works.
You and your CPA decide what is material and which estimates to use. Numbrr applies it the same way each month. Numbrr works for US companies in US dollars and keeps accrual-basis books on every plan. The month-end close checklist shows where accruals fit in the close, and cash vs accrual accounting for startups explains the larger switch.
What is an accrued expense?
An accrued expense is a cost you have incurred and have not yet been billed for or paid by the end of the period. You record the expense in the month the service was received and record a liability, accrued expenses, until the bill arrives.
What is the difference between accrued expenses and accounts payable?
Accrued expenses are costs with no bill recorded yet. Accounts payable are costs where the bill has been recorded and not yet paid. An accrued expense becomes an account payable when the bill is entered.
What are examples of accrued expenses?
Wages and payroll taxes earned and not yet paid, bonuses and commissions, professional fees for work done and not invoiced, usage-based services such as cloud hosting, utilities, and interest on loans.
What is the journal entry for an accrued expense?
Debit the expense account and credit accrued expenses, a liability. On the first day of the next month, reverse it by debiting accrued expenses and crediting the expense. When the bill arrives, record it normally.
Why reverse an accrual?
Reversing the accrual on the first of the next month cancels the estimate, so the real bill can be recorded the normal way without counting the cost twice. Only the difference between the estimate and the bill remains in the new month.
Do I need to accrue every expense?
No. Set a materiality threshold in your policy and accrue the items above it. Skipping small items keeps the close fast, as long as the policy is written and applied consistently.
Does Numbrr handle accrued expenses?
Yes, from Numbrr One. The Accrued Expenses page keeps accruals, reversals and aging, shows a month-end view of expected accruals as Accrued or Pending, and proposes accruals that you approve. Accruals can reverse automatically, and bills can be dated by their service period.