Accrued Expense

What Is an Accrued Expense?

An accrued expense is a cost that a company has already used or incurred but has not yet paid for. Because the obligation exists, accounting rules require it to be recorded in the period when it was incurred. Under the accrual accounting method, a company matches expenses to the revenue they help produce, so the timing of the cash payment does not decide when the expense appears on the books.

Common examples include wages earned by employees but not yet paid at the end of a month, interest that has built up on a loan between payment dates, and utility bills for electricity or water used before the bill arrives.

How It Works

When a company records an accrued expense, it makes an adjusting entry at the end of an accounting period. The expense is added to the income statement, which lowers reported profit for that period. At the same time, a liability called accrued expenses payable is recorded on the balance sheet. When the bill is finally paid, the company reduces that liability and reduces cash by the same amount. No second expense is recorded at that point, because the cost was already counted.

Why It Matters to Investors

Accrued expenses give a more complete picture of a company's costs and obligations than cash payments alone. A company that delays recording its accrued expenses can appear more profitable than it really is, so analysts often check whether these liabilities are growing faster than sales or operating costs. Changes in accrued expenses also show up in the operating section of the cash flow statement, where an increase in accrued liabilities is usually added back to net income. This can mean cash flow is higher than reported profit for a period, which is a reason to read the statements together rather than in isolation.

Accrued Expenses and Other Terms

Accrued expenses are sometimes confused with accounts payable. Accounts payable generally refers to amounts billed by a supplier and recorded as an invoice, while accrued expenses often exist before any invoice has been received. Both are current liabilities, meaning they are normally due within one year.