Understand what accrued expenses are and how to record them. Learn more about these and similar accounting terms in this guide to tracking accrued expenses.
Accrued expenses are expenses that haven’t been paid yet. These are expenses that build up over time and are imminently due to be paid. For example, a company might receive goods or services but haven’t paid for them. It’s a similar concept to buying something with a credit card. You get the item, but you pay for it later. You’re still responsible for making that payment and need to account for it in your budget.
Tracking accrued expenses is important because they represent a liability for your company (i.e., money that must eventually be paid out) and significantly impact your financial statements. For businesses, it’s important to know accrued expenses because they can substantially impact cash flow.
Accrued expenses are services or goods you’ve received that haven’t been billed for or paid yet.
This type of expense can build up over time, including interest on a loan, rent for a property or services rendered but not yet invoiced. For businesses, it’s important to keep track of accrued expenses and to account for them in the correct period and budget accordingly.
Your business has two core types of expenses: accrued and prepaid. With accrued expenses, you pay for the goods or services after receiving them. With prepaid expenses, you pay for the goods or services before you receive them.
Both the terms “accrued expenses” and “accounts payable” refer to money your company owes. However, the two differ. Accrued expenses have to be accounted for, even though you haven't received an invoice for accrued expenses or paid for them.
Accounts payable are those expenses that you’ve received invoices and have not yet paid what you owe. Accrued expenses build up over time and are imminently due for payment while accounts payable are ongoing expenses that will be paid within a set timeframe.
An accrued expense—also called accrued liability—is an expense recognized as incurred but not yet paid. In most cases, an accrued expense is a debit to an expense account. This increases your expenses. You may also apply a credit to an accrued liabilities account which increases your liabilities.
You may have accrued expenses from various sources. A few examples of the accrued expenses that your company might need to track include:
Your employee wage bill
Property rental costs
For businesses, it's important to keep track of accrued expenses, such as utilities, rent, or salaries. You can track expenses in the following ways: :
Accounting software: Accounting software typically lets you create an accrued expenses account that will help you keep track of how much money you owe and when the payments are due.
Spreadsheet or journal: This option allows you to list all of your accrued expenses and can be helpful if you want to see a clear overview of what you owe and when the payments are due.
Keep in mind: When recording accrued expenses in accounting records (known as "journal entries"), it's important to use the correct accrual date. The accrual date is generally the date that the expense was incurred (e.g., December 31st for interest expense) rather than the date it’s paid on.
An accrued expense journal is a bookkeeping method that businesses use to track expenses and ensure that they’re paid promptly. Having an accrued expense journal comes with several advantages. This includes helping your business:
Keep track of your spending
Budget for upcoming expenses
Negotiate better payment terms with suppliers
Track trends in their spending behavior
The following are accounting terms that you might come across as you research business accounting methodologies:
Accounts payable is the amount of money a company owes to its creditors for goods and services received. The term refers to expenses that have been invoiced but not yet paid. This debt is typically paid within 30 to 90 days.
An unpaid invoice is a request for payment that has not yet been received. This can happen for several reasons, such as the customer not yet receiving the goods or services or the customer not yet approving the invoice.
An overdue invoice is a bill that has not been paid within the agreed-upon timeframe. An invoice can become overdue because a company forgets to make the payment or can’t afford to cover the cost of the invoice. An overdue invoice is also called a “past due bill and might attract a late penalty fee, which must be paid in full.
When you’re dealing with current liabilities, you’re managing obligations typically due within one year. Current liabilities are important because they represent the short-term obligations of a company. You might have a few different types of current liabilities, which include accounts payable, taxes payable, and short-term debt.
Taxes payable is money you owe to the government in income taxes, property taxes, or other company taxation. This tax is typically based on the company's profits, but it can also be based on other factors, such as the company's size or revenue. The taxes payable may include federal, state, and local taxes.
Short-term debt is money you borrowed from lenders and need to pay back within one year.
This type of debt can include credit card debt, car loans, and other types of loans. Paying off short-term debt is important because it can help you avoid high-interest rates and late fees. Short-term debt is another term for ‘current liabilities.’
If you'd like to learn more about accrued expenses and other accounting mechanisms, you might like to consider the Fundamentals of Accounting Specialization, offered by the University of Illinois on Coursera. This specialization is designed to help entrepreneurs and managers learn accounting basics.
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