Guides
Accrued Expenses: Definition and Journal Entries
Accrued expenses are costs a business has already incurred but has not yet paid or been billed for, recorded with a debit to an expense account and a credit to a liability account. They exist because accrual accounting reports a cost in the period it happens, not the period cash leaves the bank. Wages earned in the last week of December but paid in January are the classic case.
An accrued expense sits on the balance sheet as a current liability (often labeled “accrued liabilities” or “accrued expenses payable”) until the cash payment clears or the supplier invoice arrives. The entry is an adjusting entry, usually booked at period end to close the books accurately.
What are accrued expenses?
An accrued expense is a liability for a cost that has been consumed in the current period but has not yet been invoiced or paid. You recognize it by debiting the relevant expense (increasing it on the income statement) and crediting an accrued liability (increasing what you owe on the balance sheet). The amount is often an estimate based on a contract, a rate, or partial-period usage.
Accrued expenses are the mirror image of a prepaid expense. A prepaid expense is cash paid before the cost is consumed (an asset). An accrued expense is a cost consumed before cash is paid (a liability).
The recognition trigger is consumption, not payment or billing. If your team worked the hours, the electricity ran, or the loan accrued interest, the cost belongs in that period even if no invoice has landed.
Common accrued expenses include:
- Wages and salaries earned but not yet paid (accrued payroll)
- Interest owed on loans or bonds but not yet due
- Utilities used but not yet billed
- Income taxes owed on current-period profit
- Rent or services consumed ahead of the invoice
- Employer payroll taxes and accrued vacation or bonuses
Accrued expenses vs accounts payable
Accrued expenses and accounts payable are both current liabilities for costs not yet paid, but they differ in one thing: whether an invoice exists. Accounts payable records a specific supplier invoice already received, so the amount is exact and the vendor is known. An accrued expense is recognized before any invoice, so the amount is often an estimate. Once the invoice arrives, the item typically moves from accrued liability to accounts payable.
| Feature | Accrued expenses | Accounts payable |
|---|---|---|
| Trigger to record | Cost incurred (consumed) | Invoice received |
| Invoice on hand? | No | Yes |
| Amount | Often estimated | Exact, from the invoice |
| Vendor identified? | Sometimes not yet | Yes, specific supplier |
| Typical entry timing | Period-end adjusting entry | When the bill is entered |
| Balance sheet line | Accrued liabilities (current) | Accounts payable (current) |
| Common examples | Wages, interest, utilities, taxes | Supplier and vendor bills |
Both usually settle within a year, so both are current liabilities. The practical sequence for a billed cost can run: accrue at period end (estimate), reverse at the start of the next period, then record accounts payable when the actual invoice arrives. For costs that are always invoiced promptly, many businesses skip the accrual and book accounts payable directly. For more on how liabilities move through the books, see how to read a balance sheet.
Why accrued expenses exist: accrual accounting
Accrued expenses exist because accrual accounting follows the matching principle: expenses are reported in the same period as the revenue and activity they helped produce, regardless of when cash moves. Cash-basis accounting records a cost only when paid, which can push December’s wages or interest into January and distort both months. Accruals keep each period’s profit honest.
Under U.S. GAAP, accrual accounting is the standard for financial statements, and it is required for many businesses for tax purposes once average annual gross receipts pass the inflation-adjusted threshold (about $30 million for the 2025 tax year under IRC Section 448). Smaller businesses may use the cash method, in which case accrued expenses generally do not apply.
Skipping a valid accrual understates liabilities and overstates net income in the current period. That can mislead lenders, investors, and management, and it can distort ratios such as working capital. See cash vs accrual accounting for the threshold rules and when a business must switch.
The accrued expense journal entry
The core accrued expense journal entry debits an expense account and credits an accrued liability account for the same amount. The debit raises the expense on the income statement in the correct period. The credit raises the liability on the balance sheet to show the obligation. Both sides equal the estimated cost consumed but not yet paid.
Example: a company owes employees $8,000 in wages for work done in the last week of December, payable January 5.
At December 31 (adjusting entry):
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Wages expense | $8,000 | |
| Dec 31 | Accrued wages payable | $8,000 |
This entry follows the standard rules: expenses increase with a debit, liabilities increase with a credit. If you want the underlying logic, see debits and credits explained and journal entries explained.
When the wages are paid on January 5 (assuming no reversing entry was used):
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 5 | Accrued wages payable | $8,000 | |
| Jan 5 | Cash | $8,000 |
The payment clears the liability and reduces cash. No expense hits January, because the cost was already recognized in December.
Reversing entries for accrued expenses
A reversing entry is an optional journal entry booked on the first day of the new period that flips the prior period’s accrual. It debits the accrued liability and credits the expense, zeroing out the accrual. Its purpose is to let staff record the eventual cash payment or supplier invoice normally, without having to remember that part of it was already accrued, which prevents double-counting the expense.
Using the $8,000 wages accrual, the reversing entry on January 1:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1 | Accrued wages payable | $8,000 | |
| Jan 1 | Wages expense | $8,000 |
This leaves an $8,000 credit (negative) balance in wages expense at the start of January. When the full $8,000 is paid on January 5, the bookkeeper records the routine payroll entry, debit wages expense $8,000 and credit cash $8,000. The negative $8,000 and the new $8,000 net to zero, so January carries no wages expense for that week and the liability is gone.
Reversing entries are a convenience, not a requirement. Many accounting systems automate them. Without a reversal, the payment must be split against the liability instead, as shown in the section above. Either approach reports the expense exactly once, in the correct period.
Accrued expenses examples with entries
Below are three common accruals with their period-end entries. Each debits an expense and credits a matching liability, and each amount reflects the portion consumed in the current period.
| Scenario | Debit | Credit | Amount |
|---|---|---|---|
| Interest on a loan for December, due January | Interest expense | Accrued interest payable | $1,500 |
| Electricity used in December, billed in January | Utilities expense | Accrued utilities payable | $600 |
| Income tax owed on December profit | Income tax expense | Income taxes payable | $12,000 |
The interest accrual reflects one month of interest that has built up on the loan balance even though the payment is not due yet. The utilities accrual uses an estimate (often prior-month usage) because the meter reading and bill have not arrived. The tax accrual records the estimated liability on current-period earnings.
Each of these liabilities is a current liability if it will be settled within a year, which is nearly always the case for routine accruals. They feed directly into current liabilities and therefore into working capital, so unrecorded accruals overstate a company’s short-term financial health.
Frequently asked questions
Is an accrued expense a debit or a credit?
Recording an accrued expense uses both. You debit the expense account to raise it on the income statement and credit an accrued liability account to raise it on the balance sheet. The liability itself normally carries a credit balance. When the expense is later paid, you debit the liability and credit cash, which removes the obligation and reduces the bank balance.
Are accrued expenses a liability or an expense?
They are both, on different statements. The expense appears on the income statement for the period the cost was incurred. The unpaid obligation appears on the balance sheet as a current liability, usually called accrued expenses or accrued liabilities, until cash is paid. Recording the accrual affects both statements at once, which is why it is an adjusting journal entry.
What is the difference between accrued expenses and accounts payable?
Accounts payable records a specific supplier invoice you have received but not paid, so the amount is exact. An accrued expense is recognized before any invoice arrives, based on a cost already consumed, so the amount is often estimated. Once the invoice for an accrued item lands, the obligation typically moves from accrued liabilities to accounts payable.
Do I need a reversing entry for an accrued expense?
No, reversing entries are optional. They exist to simplify recording the later payment or invoice so no one double-counts the expense. If you skip the reversal, you instead record the payment directly against the accrued liability. Both methods report the expense once, in the correct period. Many accounting systems can automate the reversal on the first day of the next period.
Where do accrued expenses appear on the financial statements?
The expense appears on the income statement in the period incurred, reducing net income. The unpaid obligation appears on the balance sheet under current liabilities, often as a line called accrued expenses or accrued liabilities. When the cash is paid, the liability is removed and cash falls, with no further effect on the income statement.
Are accrued expenses only used in accrual accounting?
Generally yes. Accrual accounting recognizes costs when incurred, which is what creates an accrued expense. Cash-basis accounting records a cost only when it is paid, so it does not book accruals. Businesses above the IRC Section 448 gross-receipts threshold (about $30 million for 2025) usually must use the accrual method, making accrued expenses standard practice for them.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.