Financial Glossary
Accrued Expenses
Accrued expenses are costs a business has incurred during a period but has not yet paid or been billed for, such as wages earned by employees, interest on a loan, or utilities used but not yet invoiced. Under accrual accounting, these expenses are recorded when incurred rather than when cash changes hands. The typical journal entry debits an expense account and credits an accrued liability account, recognizing the obligation on the balance sheet until it is paid.
Problem & Application
Owner-operated businesses and startups that run on accrual accounting need accrued expenses to keep each month's financials honest, since recording payroll, interest, or vendor costs only when paid can make a strong month look better than it was. For hospitality and campground operators with biweekly payroll or end-of-month vendor bills, accruals match labor and supply costs to the periods that actually generated the revenue. Without them, profit swings artificially based on payment timing rather than real performance.
In Short
Accrued expenses ensure costs land in the period they belong to, giving an accurate picture of profitability. They are a core mechanic of accrual accounting and clean monthly reporting.