Accrued Expenses: Examples and Journal Entries

Accrued expenses are costs your business has incurred during a period but has not yet been invoiced for or paid by the period end. Typical examples are unpaid wages, loan interest and utilities used but not yet billed. You record them by debiting an expense account and crediting a liability called accrued expenses or accrued liabilities, then clear the liability when you pay.

This guide explains when to accrue, how accruals differ from accounts payable, and how to post the accrued liabilities journal entry with three worked examples. It assumes you are comfortable with debits and credits; if not, start with our guide to double-entry bookkeeping.

Why accrued expenses exist: the matching principle

Accrual accounting records income when it is earned and costs when they are incurred, regardless of when cash moves. The aim is to match each period's revenue with the costs of earning it. If your staff work the last week of December but are paid in January, that labor helped produce December's revenue, so the cost belongs in December.

Without accruals, profit swings around depending on when bills happen to arrive. A month with three utility bills looks expensive; the next month looks cheap. Accruals smooth that out so the profit and loss reflects what actually happened. If you are not sure which method your business uses, our comparison of cash vs accrual accounting explains the differences and who typically uses each.

Accruals are the mirror image of accrued revenue, where you have earned income but not yet invoiced it. Our guide to deferred revenue vs accrued revenue covers the income side.

Common examples of accrued expenses

Accrual	Why it is unpaid at period end	How to estimate
Wages and salaries	Staff worked days after the last payroll cut-off	Days worked x daily rate
Employer payroll taxes	Linked to the accrued wages	Accrued wages x employer tax rate
Interest on loans	Interest builds daily but is charged monthly or quarterly	Balance x annual rate x days / 365
Utilities	Usage this month is billed next month	Meter reading or prior bill adjusted
Professional fees	Accountant or lawyer has done work but not invoiced	Engagement letter, hours worked or quote
Contractor or freelancer work	Work delivered but invoice not yet received	Agreed rate x work delivered
Bonuses and commissions	Earned this year, paid after year end	Plan formula applied to results
Goods received not invoiced	Delivery arrived before the supplier's invoice	Purchase order price x quantity received

Accrued expenses vs accounts payable

Both are liabilities for costs already incurred, and both usually sit in current liabilities. The deciding question is whether you hold a supplier invoice.

Feature	Accrued expenses	Accounts payable
Invoice received?	No	Yes
Amount	Often an estimate	Exact, per the invoice
When recorded	Usually at period end as an adjusting entry	When the invoice is entered
Tracked by supplier?	Usually as a schedule, not a sub-ledger	Yes, in the payables sub-ledger
Typical items	Wages, interest, unbilled utilities, fees	Supplier bills for goods and services

In practice, an accrual often turns into a payable. You accrue an estimated $1,500 for the accountant's December work; in January their invoice arrives and you record it in payables. The accrual is cleared at that point. For more on the payables side, see our guide to the accounts payable process.

The accrued liabilities journal entry, step by step

Every accrual follows the same three-stage pattern:

1. Period end: record the accrual. Debit the expense, credit Accrued Liabilities.
2. Start of next period: reverse it (optional but common). Debit Accrued Liabilities, credit the expense.
3. When the bill arrives or is paid: record it normally. Debit the expense, credit Cash or Accounts Payable.

If you do not use reversing entries, step 3 becomes: debit Accrued Liabilities (and the expense account for any difference), credit Cash or Accounts Payable. Both methods give the same result; reversing entries simply let whoever enters bills treat every invoice the same way.

Worked example 1: unpaid wages at month end

A small firm pays four employees every Friday for the week ended that day. The combined daily wage bill is $1,200. December 31 falls on a Wednesday, so staff have worked Monday to Wednesday (three days) that will be paid on Friday, January 2. Employer payroll taxes are assumed at 7.65% for this example.

• Accrued wages: 3 days x $1,200 = $3,600
• Accrued employer payroll tax: $3,600 x 7.65% = $275.40

December 31 adjusting entry:

Account	Debit	Credit
Wages Expense	$3,600.00
Payroll Tax Expense	$275.40
Accrued Liabilities (wages and payroll tax)		$3,875.40

January 1 reversing entry:

Account	Debit	Credit
Accrued Liabilities	$3,875.40
Wages Expense		$3,600.00
Payroll Tax Expense		$275.40

On January 2 payroll runs for the full week (five days, $6,000 of wages) and is recorded as usual. January's wages expense nets to $6,000 minus the $3,600 reversal, or $2,400, which is exactly the two days worked in January. December carries the three days worked in December. Payroll tax rates and withholding differ by country and change over time, so confirm the current rates with your payroll provider.

Worked example 2: an estimated utility bill

A workshop's electricity is billed about three weeks after each month ends. For March, the bookkeeper estimates $620 based on a meter reading. The March 31 entry:

Account	Debit	Credit
Utilities Expense	$620
Accrued Liabilities		$620

The actual bill arrives on April 20 for $655. Without a reversing entry, the bookkeeper clears the accrual and books the $35 difference to April:

Account	Debit	Credit
Accrued Liabilities	$620
Utilities Expense	$35
Accounts Payable		$655

March shows a reasonable estimate; April absorbs a small correction. You do not go back and change March for a difference this size.

Worked example 3: accrued interest on a loan

A business has a $50,000 loan at 6% annual interest, charged quarterly in arrears. At the end of each month it accrues one month of interest: $50,000 x 6% / 12 = $250.

Date	Account	Debit	Credit
Jan 31	Interest Expense / Accrued Liabilities	$250	$250
Feb 28	Interest Expense / Accrued Liabilities	$250	$250
Mar 31	Interest Expense / Accrued Liabilities	$250	$250
Mar 31	Accrued Liabilities / Cash (quarterly charge paid)	$750	$750

Each month bears its own interest cost, and the accrual builds to $750 before the bank charges it. For a precise figure, banks usually compute interest on actual days, so use the bank's statement method if the difference matters.

How to estimate accruals reliably

• Use source data, not guesses. Timesheets, purchase orders, delivery notes, usage portals and loan agreements all give you defensible numbers.
• Keep an accruals schedule. A simple spreadsheet listing each accrual, the basis of the estimate, the amount and when you expect the invoice.
• Look back after the fact. Compare last month's estimates with the actual bills. If you are always low on one item, adjust your method.
• Set a materiality threshold. Many small businesses only accrue items above a set amount, such as $250, to avoid busywork. Agree the level with your accountant.
• Ask suppliers. A short email to regular suppliers before month end often gets you the figure they are about to invoice.

Where accrued expenses appear in the financial statements

Accruals touch both main statements. On the profit and loss, the cost sits in its normal expense line (wages, utilities, interest), so readers do not see a separate accruals figure. On the balance sheet, the unpaid amount appears under current liabilities, usually as one line called accrued liabilities or accruals, next to accounts payable.

Here is how the three examples above would look on a December 31 balance sheet, assuming the March utility accrual has already been cleared and one month of loan interest is outstanding:

Current liabilities	Amount
Accounts payable	$8,420.00
Accrued wages and payroll taxes	$3,875.40
Accrued interest	$250.00
Sales tax payable	$1,960.00
Total current liabilities	$14,505.40

Leaving the accruals out would understate liabilities by $4,125.40 and overstate December profit by the same amount. That flows straight through to equity, which is why accruals matter for the year-end retained earnings figure as well as the monthly results. When you run a trial balance after posting accruals, the liability account should agree with your accruals schedule line by line.

On the cash flow statement prepared with the indirect method, an increase in accrued liabilities is added back to net income, because the expense reduced profit without using cash in that period. A decrease, when you pay off accruals, reduces operating cash flow. That is one reason profit and cash can differ sharply around year end.

What a small business actually needs to accrue

Not every business needs a full accruals routine every month. A practical approach depends on who uses your accounts:

• Sole trader on cash basis, no lender reporting: no accruals in the books. Keep a list of known unbilled costs so you can plan cash.
• Small company preparing annual accounts: accrue at year end at least, especially wages, bonuses, accountancy fees, interest and goods received not invoiced.
• Business with a bank loan or investors: accrue monthly if you send management accounts, because lenders and investors compare month to month.
• Growing business with staff: accrue payroll every month; it is usually the largest and most predictable item.

Whichever level you choose, record each accrual in the general ledger with a clear description and a reference to the working, such as 'Dec wages 29-31 per timesheets', so the entry can be traced later.

Month-end checklist for accrued expenses

1. Calculate wages and payroll taxes for days worked since the last pay date.
2. Accrue interest on every loan and credit line since the last charge.
3. List deliveries received with no invoice yet (goods received not invoiced).
4. List services received with no invoice: utilities, contractors, professional fees, freight.
5. Post the accruals and schedule the reversing entries.
6. Reconcile the Accrued Liabilities balance to your schedule.
7. Clear any accruals left over from earlier months that have since been invoiced.

These steps fit naturally into a wider month-end close checklist. Accruals are one of the most common sources of difference at close, so it pays to make them routine.

Common mistakes

• Double counting. Accruing an expense and then recording the full invoice without reversing or clearing the accrual.
• Stale accruals. Balances that sit for months because nobody cleared them when the bill arrived. Review the account every month.
• Accruing items that are prepaid. If you paid in advance, that is a prepayment, not an accrual. See our guide to prepaid expenses.
• No documentation. Auditors and lenders will ask how each estimate was calculated.
• Assuming book and tax timing match. Tax rules on when an accrued cost is deductible can differ from accounting rules, especially for bonuses and amounts owed to related parties. Check with a qualified adviser.

Next step

Accruals cover the costs you owe before the paperwork arrives. The flip side is making sure your own paperwork goes out on time, so your customers can record and pay your invoices promptly. Create clear, numbered invoices with our free invoice generator, and see more practical accounting walkthroughs in our business finance section.