Accrued Expenses

Definition

Accrued expenses are expenses that have been incurred but not yet paid for by a business. These are recognized in the accounting period in which they are incurred, following the accrual basis of accounting, as mandated by both GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). Accrued expenses are recorded as a liability on the balance sheet, reflecting the company's obligation to pay for these expenses in the future. Types of accrued expenses can include wages payable, interest payable, utilities, and taxes that are recognized but not yet paid.

‍

Example

Imagine a company, ABC Inc., has its financial year-end on December 31. The company received utility services for the month of December amounting to $2,000, but the bill will not be paid until January. Under accrual accounting, ABC Inc. will record an accrued expense in December by debiting utility expense for $2,000 and crediting accrued expenses (liability) for $2,000. This entry ensures that the expense is recognized in the period it was incurred, even though payment occurs in a different period.

‍

Why It Matters

Accrued expenses are important for a business as they ensure that financial statements provide an accurate picture of the company’s obligations and expenses within an accounting period. This is crucial for assessing the company's financial performance and position, aiding in effective budgeting, financial planning, and decision-making. It also ensures compliance with accounting principles and regulations.