An accrued expense is a cost a business has already incurred in a period and has not been invoiced for or paid by the end of it. The cost is charged to that period’s income statement, and the amount owed sits on the balance sheet as a liability, commonly captioned accrued expenses or accrued liabilities, until the supplier’s invoice arrives or the payment goes out. Expense accrual names the same item from the entry side, so the two phrases describe one thing: the expense the period takes and the liability the balance sheet keeps.
An accrual runs in two directions. This is the liability side. The asset side, revenue earned and not yet billed, is in accrued revenue, and how both are captioned under Regulation S-X is in accruals. The balance here is ordinarily a current liability, on the classification test in current liabilities.
The Entry That Records It
Debit the expense account for the cost the period incurred and credit accrued liabilities for the same amount. Cash is on neither side, which is the test that makes it an adjusting entry rather than a payment, set out in adjusting entries.
The balance comes off one of two ways in the next period. Reverse the entry on the first day, and the supplier’s invoice can be coded and posted in full when it lands. Leave it standing, and the invoice posts against the accrued balance, with only the difference between the estimate and the final amount reaching the expense account. The reversal route is worked through with numbers in accruals.
What a Firm Accrues at Close
A handful of items recur at close, in a firm’s own books and in the client books it keeps.
Accrued payroll and payroll taxes come from the pay period that straddles the period end: days worked in the closing month and paid in the next belong to the closing month. The employer’s own share of Social Security and Medicare tax accrues with those wages, at the same rate as the employee’s share of those two taxes, though the Additional Medicare Tax is imposed on the employee alone and carries no employer share at all (IRS Publication 15 (2026)). The employer share accrues because it is a tax on the employer rather than an amount withheld, and the thresholds that govern the Additional Medicare Tax are set out in additional medicare tax. Tax withheld from the employee’s pay is a different balance, money held for someone else, which current liabilities sets out.
Accrued interest is the interest the passage of time has run up on a loan or a line of credit and nobody has paid yet, and its day count math is in accrued interest.
Accrued utilities are power, water and telecoms consumed through the period end and metered or billed after it, so the amount is an estimate until the bill arrives.
Accrued professional fees are legal, audit or advisory work performed before the period end and invoiced after it, where the work being done is certain and the price is not.
A Worked Example
Say a firm runs a biweekly payroll across ten working days, and the pay period straddles a month end with seven of those days falling in the month being closed. The employer payroll tax on those wages accrues on the same seven-tenths, as a credit separate from the wages themselves.
Gross wages for the ten-day pay period 48,000
Working days falling in the closing month 7 of 10
Accrued at the month end, 7/10 of 48,000 33,600
Month-end entry Debit Credit
Salaries expense 33,600
Accrued payroll 33,600
Next month, payroll run posted in full 48,000
Less the accrual reversed on the first day (33,600)
Wages left in the next month 14,400The closing month carries the seven days it earned and the next carries the three, so the two together carry the payroll once. Leaving the accrual standing rather than reversing it lands the same three days in the next month.
Accrued Expenses Versus Accounts Payable
Both are amounts owed at the reporting date, and they separate on evidence: a trade payable is keyed from a document the supplier sent, while an accrued expense is the business’s own estimate of a cost it has incurred and has not been billed for. That test, and how each one is presented, is in accounts payable.
What stands behind the number differs with it. An accrued balance is supported by a schedule someone built rather than by an invoice file, so its support is the payroll register, the loan agreement, the engagement letter or the meter reading. Whether the amount is deductible in the same year is a separate question with its own economic performance test (accrual accounting).
Common Questions
Wages earned and not yet paid, the payroll tax on them, interest run and not paid, utilities used and not billed, and professional fees for work already performed. Each is a cost the period incurred with no supplier invoice behind it.
Debit the expense account and credit accrued liabilities at period end, for the amount the period incurred, taken off the support behind it rather than off what has posted. Then either reverse the entry on the first day of the next period or post the invoice against it.
Liabilities, never assets. The balance is a present obligation to transfer an economic benefit, the test set out in liabilities, and what satisfies it is the cost having been incurred rather than the invoice having arrived. The direction people usually have in mind when they ask is a cost paid before the period it belongs to, which parks an asset and is a deferral rather than an accrual (deferral).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own accrual schedules at close through a trial task before its own reviewer relies on them.
