Table of Contents
Introduction
Your bank statement doesn’t pop up every other cost right after you make it in your business. But just because you haven’t paid for something yet doesn’t mean it hasn’t happened. Unpaid salaries at the end of the month or even a utility bill that you have not received yet are expenses that have already been used up by your business. These particular ones are called accrued expenses, and they play a major role in keeping your finances honest and up to date.
Accrued expenses are the costs that your business owes but has not paid yet. Even if the bill has not arrived or the cash hasn’t left your account, then this amount needs to be recorded. This is mainly because they give a clean image of your business’s real financial condition.
In fact, according to the U.S. Small Business Administration, businesses often choose accrual accounting, recording expenses as they happen, not when cash changes hands, to get a clearer financial snapshot.
This blog post explains what accrued expenses really are and how to record them in a proper manner. Especially if you’re working with an accountant or trying to keep your books investor-ready.
Are you currently managing your bookkeeping in-house?
What Are Accrued Expenses?
Accrued expenses are liabilities your business owes for goods or services already received, even though you haven’t paid for them yet. These expenses are recorded before the cash transaction occurs, ensuring your books reflect the actual cost of doing business.
Examples include:
- Salaries earned but not yet paid
- Utilities used but not yet billed.
- Legal or professional services completed but invoiced later.
- Loan interest that’s accumulated but unpaid
Accrued expenses help align your costs with the correct accounting period. That’s essential for accurate profit reporting.
Why Accrued Expenses Matter
Ignoring accrued expenses can lead to misleading financials and serious cash flow planning mistakes. Here’s why they matter:
Accurate Reporting
Recording accrued expenses ensures your profit and loss statement reflects what happened, regardless of payment timing.
Regulatory Compliance
Under GAAP, expenses must be recognized when they’re incurred. Accrual-based accounting requires that you include them even before payment.
Better Cash Flow Visibility
Knowing what you owe, even if it’s not due yet—helps you plan your finances with more control and fewer surprises.
Audit and Investor Readiness
Clean accrual records show you’re serious about accuracy. They reduce red flags and boost confidence among auditors, lenders, and stakeholders.
How to Record an Accrued Expenses Entry
Recording an accrued expense involves two key accounts:
- Debit the relevant expense account (e.g., Wages Expense, Utilities Expense)
- Credit Accrued Expenses under Liabilities
Example:
You used $1,200 worth of electricity in June, but you’ll receive the bill in July.
- Debit: Utilities Expense $1,200
- Credit: Accrued Expenses $1,200
When you pay in July:
- Debit: Accrued Expenses $1,200
- Credit: Bank/Cash $1,200
This keeps your June financials accurate, even if the money leaves your account later.
Accrued Expenses Journal Entry: Real Examples
Example 1 – Payroll
Employees worked the last week of June, but payday falls in July. That week’s wages total $4,500.
June 30 entry:
- Debit: Wages Expense $4,500
- Credit: Accrued Payroll $4,500
On July 5:
- Debit: Accrued Payroll $4,500
- Credit: Bank $4,500
Example 2 – Loan Interest
Your business owes $300 in interest by June 30, but the bank deducts it in mid-July.
June 30 entry:
- Debit: Interest Expense $300
- Credit: Accrued Interest $300
Example 3 – Professional Services
A consultant finishes a $1,000 project in June. The invoice comes in July.
June 30 entry:
- Debit: Consulting Expense $1,000
- Credit: Accrued Expenses $1,000
These accrued expenses journal entries match the expenses to when they occurred, not when they were paid.
How Accrued Expenses Are Classified in Financial Statements
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On the Income Statement:
The cost (wages, interest, services) shows up under operating expenses in the period it was incurred.
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On the Balance Sheet:
Accrued expenses appear under Current Liabilities. These are amounts owed in the short term, typically within one year.
This classification gives stakeholders and financial managers a clear picture of what the business truly owes at any point in time.
The 8.5-Month Rule – What You Should Know
You may come across the “8.5-month rule” in tax-related contexts. It’s often used when discussing deferred compensation, not day-to-day accrued expenses.
For most small businesses, this rule doesn’t apply to common accruals like unpaid wages or utility bills. If your team has performed the work or your business has received the service, you should record the expense, no matter when the invoice shows up.
Tips for Managing Accrued Expenses
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Record Early, Not Late
If you know an expense was incurred, even without an invoice- log it at month-end.
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Automate Recurring Entries
Wages, rent, and loan interest, these often recur monthly. Use your accounting software to automate their accrual.
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Match Payments to Accruals
When payments are made, make sure they reduce the related accrued liability. This keeps your books balanced.
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Keep Source Docs Ready
Even without an invoice, keep records: contracts, timesheets, email confirmations. These back up your entries during audits.
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Reconcile Monthly
Review your accrued liabilities each month. If something hasn’t been paid or reversed, investigate why.
Let Orbit Help You
Tracking your accrued expenses entry every month can feel like a chore, but it’s a game-changer for clean, smart financials.
At Orbit Accountants, we help small businesses and startups across the U.S. build bulletproof accrual systems. Whether you’re transitioning to accrual-based bookkeeping, preparing for funding, or just tired of inconsistent books, we’ve got your back.
Let’s simplify your accounting, together.
- Accrual setup and review
- Clean journal entries
- Month-end close support
- Stress-free audit prep
Ready to clean up your books and get ahead?
Book a free consultation today.
Frequently Asked Questions
What are accrued expenses?
Accrued expenses are the costs your business has already incurred but hasn’t paid for yet. These could include unpaid wages, utility bills, or other business-associated services you’ve used but haven’t been billed for.
How are accrued expenses classified in financial statements?
They appear under Current Liabilities on your balance sheet. Since these are short-term obligations, they’re expected to be paid within the next financial year. The matching expense is also recorded in your income statement during the period it was incurred.
What is an accrued expense best described as?
It’s a liability for a cost that’s already been used or earned by someone else, but you haven’t paid them yet. It ensures your books reflect the real financial activity of your business.
Why are accrued expenses important?
They help align your accounting with the actual timing of business activity. Without them, your reports could understate your expenses and overstate your profits.
What is the 8.5-month rule for accrued expenses?
The 8.5-month rule relates to tax timing for deferred compensation and isn’t typically relevant for regular business expenses like wages or rent. In most cases, you should record the expense as soon as it’s incurred, regardless of when it’s paid.
