Why it matters
Accrued expenses keep the profit and loss statement from looking better than the business really is. Payroll, utilities, interest and professional fees often arrive after the period they belong to.
Example
A client's December payroll for the last week of the month is paid on January 3. The bookkeeper records the wages and payroll taxes as a December expense and a liability, then reverses the accrual when the payroll is paid.
Related terms
Questions about Accrued expense
What is the difference between an accrued expense and accounts payable?
Accounts payable usually comes from a vendor invoice the business has already received. An accrued expense is a cost the business knows it incurred but has not been invoiced for yet.
Do I need to reverse an accrued expense?
Many firms reverse the accrual at the start of the next period so the actual invoice can be recorded without double counting. The method should be consistent.