Accrued Expenses: Definition, Examples & Journal Entries

Accrued Expenses Guide

Accrued expenses are costs that a business has incurred but not yet paid or recorded through a formal invoice or payment transaction. They represent obligations that have been "earned" by vendors, employees, or service providers -- but the cash has not yet left your account. Recording accrued expenses is a cornerstone of accrual accounting and essential for producing accurate financial statements.

What Are Accrued Expenses?

An accrued expense is a liability -- money your business owes -- that arises because you have used or received something but have not yet received the invoice or made the payment. Under accrual accounting, expenses are recognized when incurred, not when cash is paid.

The most common examples of accrued expenses for small businesses include:

Accrued wages and salaries -- If your pay period ends on the 28th of the month but your employees are not paid until the 3rd of the next month, the wages for those three days are accrued expenses at month-end.

Accrued interest -- Interest that has accumulated on a loan but has not yet been paid is an accrued expense.

Accrued rent -- Rent for a period that has ended but has not yet been invoiced or paid.

Accrued utilities -- Electricity or gas used during the month but for which the bill has not yet arrived.

Accrued professional fees -- An attorney or accountant who worked during the period but has not yet invoiced you creates an accrued expense.

Accrued taxes -- Income taxes, payroll taxes, or sales taxes incurred but not yet paid.

Accrued Expenses vs Accounts Payable

Accrued expenses and accounts payable are both liabilities -- but they differ in one important way:

Accounts payable are amounts owed on invoices you have received from vendors. You have the invoice in hand; it is just not yet paid.

Accrued expenses are liabilities where you have incurred the cost but have not yet received an invoice. They require an estimate and a journal entry to record before the formal billing process occurs.

When the invoice for an accrued expense is received, it converts from an accrued expense to accounts payable.

How to Record Accrued Expenses: Journal Entries

Accrued expenses require adjusting journal entries, typically made at the end of an accounting period (month, quarter, or year) to match expenses to the correct period.

Step 1 -- Accrual entry (at period end):

Debit: Expense account (e.g., Wages Expense) -- increases the expense

Credit: Accrued Liabilities (or specific account like Accrued Wages Payable) -- records the liability

Example: $3,000 in wages incurred but unpaid at December 31:

• Debit Wages Expense $3,000
• Credit Accrued Wages Payable $3,000

Step 2 -- Reversal or payment entry (when paid):

When the payroll is processed in January:

• Debit Accrued Wages Payable $3,000
• Credit Cash $3,000

The liability is cleared and cash is reduced. The income statement correctly shows the wage expense in December when the work was performed.

See T-accounts explained for a deeper look at how these debit/credit entries work visually.

Accrued Revenue: The Mirror Concept

The mirror image of accrued expenses is accrued revenue -- revenue earned but not yet billed or received. For example, if you complete a consulting engagement in December but invoice the client in January, you have accrued revenue. Under accrual accounting, you record the revenue in December.

In Eonebill's invoicing system, recording work done and billing it later creates exactly this kind of timing difference that accrual accounting is designed to capture accurately.

Why Accrued Expenses Matter for Financial Accuracy

If you do not accrue expenses, your financial statements will understate liabilities and overstate profits for the current period -- and then show inflated expenses in the following period when you actually pay. This distorts your true business performance and can lead to poor financial decisions.

For businesses using accrual accounting, period-end accruals are part of the standard month-end close process. For businesses using cash basis accounting, accruals are not required -- income and expenses are recorded when cash changes hands. See the cash basis vs accrual accounting guide to understand which method is right for your business.

Track your expected liabilities alongside confirmed invoices using Eonebill's financial tracking tools and the expense tracker.

Common Accrued Expenses and How to Estimate Them

Accrued expenses often require estimates because the exact amount is not yet known. Here is how to approach the most common types:

Accrued wages: Calculate the number of days in the current pay period that fall within the accounting period, multiplied by the daily wage rate for each employee. For a bi-weekly payroll where the period runs December 27 - January 9, the days in December (27th-31st) are accrued at year-end.

Accrued interest: Multiply your outstanding loan balance by the daily interest rate and the number of days of interest that have accrued but not yet been paid. Daily rate = annual rate / 365.

Accrued professional fees: For ongoing retainer relationships (monthly accounting, legal counsel), accrue the monthly fee in the period when services were rendered, even if the invoice arrives in the next period.

Accrued utilities: Use prior months' bills and current usage patterns to estimate utilities for which the bill has not yet arrived. Some businesses use a rolling average of the prior 3 months.

Reversing Entries: Simplifying the Next Period

Many accountants use reversing entries to simplify accounting for accruals. A reversing entry is a journal entry made at the beginning of the next accounting period that exactly reverses the prior period's accrual entry.

Why this helps: When you accrue wages of $3,000 at December 31 and then pay the full $5,000 payroll in January (covering both the accrued December days and January days), the math gets complex. With a reversing entry, you reverse the accrual on January 1, effectively "un-recording" it. When you process the full $5,000 payroll, everything balances naturally without needing to track which portion was already accrued.

Reversing entries are a bookkeeping convenience, not a requirement, but they are standard practice in businesses that regularly make accrual entries.

Accrued Expenses on Your Balance Sheet

On the balance sheet, accrued expenses appear under current liabilities -- typically as a single line called "Accrued Expenses" or "Accrued Liabilities," or broken out by type (Accrued Wages, Accrued Interest, etc.).

A balance sheet with significant accrued liabilities tells a story: the business has obligations that will consume cash in the near future. Monitoring the trend of accrued liabilities alongside cash balances helps you anticipate cash flow needs.

For financial tracking that integrates with your invoicing and expense management, use Eonebill. See the bookkeeping for small business guide for practical month-end close procedures and the T-accounts guide for the underlying bookkeeping mechanics.

Accrued Expenses and Tax Timing

The relationship between accrued expenses and tax deductions depends on which accounting method you use:

Cash basis taxpayers (most freelancers and small businesses) deduct expenses when they pay them, not when they accrue. An accrued expense that you have not yet paid is not deductible. This simplifies tax preparation: your deductions match your bank statement.

Accrual basis taxpayers deduct expenses when they are incurred (accrued), even if unpaid. A December utility bill accrued but not paid until January is a December deduction for accrual-basis filers. This accelerates deductions but requires more meticulous bookkeeping.

For freelancers deciding between methods: cash basis is simpler and better for most service businesses. If your business carries significant inventory or has revenues above $25 million (in 2026 thresholds), accrual may be required.

Managing Accrued Expenses on Your Balance Sheet

Accrued expenses appear as current liabilities on your balance sheet because they represent money you owe but have not yet paid. Common accrued expense categories for small businesses:

Accrued wages: If you have employees or contractors who worked hours you have not yet paid for, this appears as an accrued liability.

Accrued interest: On business loans, interest accrues daily. The balance between your last payment and your current date is an accrued expense.

Accrued taxes: Quarterly estimated taxes you owe but have not yet paid appear here.

Accrued professional fees: An accountant who worked on your books in December but will bill in January represents an accrued expense.

Keeping accrued expenses accurate gives you a true picture of your financial obligations. Combine this with Eonebill's expense tracker to ensure you are capturing both paid and accrued costs, giving you a complete financial picture for business decisions.

Accrued Expenses in Small Business Decision-Making

Understanding your accrued expenses changes how you make business decisions. A business that looks at cash only sees what has already moved through the bank account. A business that tracks accrued expenses sees what is committed and coming -- and makes smarter decisions as a result.

Consider a freelancer who has accrued a $3,000 subcontractor bill, a $400 software renewal, and $800 in estimated quarterly taxes at the end of August. On a cash-only view, they have $8,000 in the bank and feel comfortable taking a two-week break before the next project. On an accrual view, their true available funds are $8,000 - $4,200 = $3,800 -- a more accurate picture that might influence the timing decision. For business owners looking to scale, tracking accrued expenses alongside cash provides the financial visibility needed to make confident decisions about hiring, taking on new clients, or investing in equipment. Combine an accurate accrued expense view with Eonebill's invoice tracking for the complete financial picture your business needs.