What are accrued expenses?

Definition of Accrued Expenses

Accrued expenses are costs that have already been incurred but have not yet been paid or documented in a financial transaction.

Definition and Examples of Accrued Expenses

Accrued expenses, similar to accounts payable, are costs your company has incurred for goods and services that have not yet been invoiced. Since the invoice (or payment date) has not arrived, no money has yet been disbursed.

Note

If you are using the cash accounting method, you may not even record accrued expenses because no money has been disbursed. However, if you are using the accrual accounting method, accrued expenses are recorded at the time they are incurred.

It is important to distinguish between accrued expenses and accounts payable. While both represent money that is to be spent, they are not the same. Accounts payable are short-term expenses that need to be paid because an invoice has been issued. Accrued expenses are costs that are recognized even though no invoice has been presented yet.

How Accrued Expenses Work

If you own a large business listed on the U.S. stock exchange, you are required to use the accrual accounting method and show accrued expenses at all times. This requirement is part of the Generally Accepted Accounting Principles (GAAP) and is considered an important means of maintaining ethical accounting practices.

If you own a small private company, GAAP does not apply to you, so you can choose whether or not to show accrued expenses in your financial records.

Note

The benefit of showing accrued expenses is that as a business owner, you will get a true picture of the amount actually available rather than the amount that has already been discussed.

Imagine you run a small business selling jewelry from a store. You have a store manager who earns $2000 at the end of each month, a cleaning service that forgets to send you the invoice and charges $200 per month, and an upcoming electricity bill of $150. A jewelry maker has billed you for a shipment worth $1000, but the invoice was lost in the mail. All of these are accrued expenses.

If you are using the cash accounting method, you would not enter any of these expenses into your accounting software. After all, no money has yet been disbursed. This keeps things simple, but it also indicates that you have an extra $3350 available – which you may spend without realizing that it has actually already been incurred. If you are using the accrual accounting method, you would have accounted for all of those expenses before they were paid.

Key Takeaways

– Accrued expenses are costs that have not yet been invoiced and have not yet been paid.

– Examples of accrued expenses include monthly costs for rent, utilities, employee wages, and some products and services if you have used them and have not yet been invoiced.

– Accrued expenses are recorded more easily under the accrual accounting method than the cash accounting method.

Source: https://www.thebalancemoney.com/what-are-accrued-expenses-5200537