Accrued Expense: What It Is & How Bookkeepers...

Accrued Expense: What It Is & How Bookkeepers Record It

It's March 31. Your client's electric bill doesn't arrive until April 8. The power ran all month, the cost is real, and the income statement needs to show it. Nothing is in accounts payable because no bill exists yet. So where does it go?

That's an accrued expense. Recognize the cost in the period it was incurred, book a liability, reverse when the actual bill arrives. Skip it and March looks more profitable than it was.

What is an accrued expense?

An accrued expense is a cost a business has incurred but not yet paid or received a vendor bill for. The expense belongs to the current accounting period even though cash hasn't moved. Bookkeepers record it by debiting the expense account and crediting an accrued liabilities account. Common examples: utilities billed in arrears ($800 estimated), payroll earned through month-end but not yet paid, and interest on a loan that accrues daily but is paid quarterly. When the actual bill or payment posts, you reverse the accrual or replace it with the real entry to avoid counting the cost twice.

Key Takeaways

Accrued expenses match cost to the period incurred, not when cash moves. That's the core of accrual-basis bookkeeping.
The journal entry is always: debit the expense, credit Accrued Liabilities. When the bill arrives, debit Accrued Liabilities and credit Accounts Payable.
Three common accruals bookkeepers touch every month: payroll cutoff, utilities billed in arrears, and loan interest between payment dates.
Year-end bonus accruals are the most often missed. $5,000 promised in December but paid in January belongs in December's books.
Reversals prevent double-counting. Book the accrual at month-end, post a reversing entry on day one of the next period, then enter the real bill.
Stale estimates cause quiet errors. Pull the two or three most recent actuals before posting, not last quarter's number.

What an Accrued Expense Actually Is

Accrual-basis accounting requires expenses to match the period the activity happened, not when cash moves. That gap between "cost incurred" and "bill received" is where accrued expenses live.

Think of it as a placeholder. The company consumed something of value this period. No vendor invoice yet, but the cost belongs in this period's income statement. Record it now with an estimate; clean it up next period when the real numbers arrive.

Accrued expenses sit on the balance sheet as current liabilities. Not the same as accounts payable: AP requires a bill in hand. An accrual entry precedes the bill. Browse the full bookkeeping glossary for related terms.

Common Accrued Expense Examples Bookkeepers See

Utilities billed in arrears. March electricity bill arrives April 8. Service ran all month. Estimate $900 based on the prior two months, book it March 31. When the actual bill arrives, reverse the accrual and enter the real amount through accounts payable.

Payroll cutoff. Pay periods rarely end on the last day of the month. Biweekly period ends April 3: employees worked March 27-31 but won't be paid until April 3. Those five days belong in March. Payroll software calculates the amount; you post the journal entry.

Accrued interest. A $200,000 loan at 6% annual interest accrues $1,000/month, but the quarterly payment hits March 31. January and February each need an accrual entry or interest expense lumps entirely into Q1's last month.

Year-end bonuses. $15,000 bonus pool announced in December, checks go out January 10. December's books need the liability. This is missed most often because payroll isn't cutting checks yet.

How to Book and Reverse an Accrued Expense

The accrual-vs-cash accounting distinction drives everything here. Three steps:

Step 1: Book the accrual at period-end.

Debit: Utilities Expense $900
Credit: Accrued Liabilities $900

Step 2: Reverse on the first day of the next period.

Debit: Accrued Liabilities $900
Credit: Utilities Expense $900

This zeroes the liability so the real bill doesn't double-count.

Step 3: Enter the actual bill through accounts payable.

When the April 8 invoice arrives for $912:

Debit: Utilities Expense $912
Credit: Accounts Payable $912

March shows $900 expense. April absorbs the $12 true-up. Skip the reversal and post the bill directly: $900 double-count in April. QBO and Xero support automatic reversing entries; set it once.

Common Gotchas

Double-count when the actual bill posts without clearing the accrual. If the reversal didn't fire, the vendor bill creates a second debit to the expense account. Check Accrued Liabilities before closing any period where accruals were posted.

Stale estimates. December's bill works for March's estimate if usage is stable. Pull two or three recent actuals when usage changed. A 20% miss on a utility accrual is small. A 20% miss on accrued payroll is a financial-statement problem.

Missing year-end bonus accruals. Bonuses announced in Q4 but paid in Q1 belong in Q4. Add a December close checklist item: "Any bonuses accrued but not paid?" If management can't give a number, use a prior-year estimate.

True-up variance. You accrued $900, actual bill is $912. Most systems absorb the $12 automatically via reversing entries. If you're doing it manually, confirm the expense account clears the difference, not Accrued Liabilities.

How Growthy Handles Accruals

Growthy doesn't auto-generate accrual estimates. A wrong estimate creates more cleanup than it saves. What Growthy does is pattern-match: when you post an accrual manually and the real bill arrives the following period, Growthy learns the pairing and flags when that accrual hasn't reversed before the matching bill posts.

The flag surfaces before the double-count, not after. You post the bill, Growthy checks Accrued Liabilities for a matching open entry, and surfaces the conflict in your review queue. You approve or dismiss.

At 85% first-import accuracy, recurring patterns like payroll cutoff and monthly interest reach near-zero manual touch within a quarter.

See how Growthy handles accruals and period-close entries.

Frequently Asked Questions

What's the difference between an accrued expense and accounts payable? AP means a vendor bill is in hand. An accrued expense means the cost was incurred but no bill has arrived. Both are current liabilities. AP starts with the invoice; an accrual starts with the economic activity.

Do cash-basis businesses use accrued expenses? No. Cash basis records expenses when paid. Accrued expenses are an accrual-basis concept only. See the accrual vs cash accounting breakdown for the full comparison.

How do I know what amount to accrue if I don't have the bill? Use the two or three most recent actuals. For payroll, use hours worked times rate. For loan interest, calculate from loan balance, rate, and days in period. Immaterial amounts (under 1% of revenue) are fine with a rough estimate. Bonus accruals need a number from management in writing.

What happens if I forget to reverse an accrual? Accrued Liabilities stays on the books and the real bill creates a double-count. Check Accrued Liabilities at period start. Any balance that should have reversed is a cleanup item.

When the cost is real, the period is closed, and the bill hasn't arrived, book it now and reverse it clean when the actual shows up. That's period-end bookkeeping.

Ready to see how Growthy handles adjusting journal entries and period-close accruals? Get Started.