Accrued Expense

MoneyBestPal Team
An accounting term that refers to an expense that is recognized on the books before it is paid for.

An accrued expense is an accounting term that refers to an expense that is recognized on the books before it is paid for. 

It's a kind of liability that develops when a business incurs a cost but does not cover it during the same accounting period. On the balance sheet and income statement, accrued expenses are listed as current liabilities and expenses, respectively.

A business may have accrued expenses for one of two reasons. One is to adhere to the matching principle, which holds that income and expense should be recorded in the same period in which they are generated and expended, respectively. This guarantees that the company's actual performance and financial position are reflected in the financial statements. The second justification is to accommodate costs like salary, interest, taxes, bills, utilities, and rent that are invoiced or taxed at a later time.

A business must make an adjusting entry at the conclusion of an accounting period to report an accrued expense. The transaction will credit the accrued expense account and debit the related expense account (a liability account). For example, if a company owes $10,000 in interest for December but will not pay it until January, it will make the following entry on December 31:

Debit Interest Expense 10,000

Credit Accrued Interest 10,000

This entry results in a liability on the balance sheet and an increase in interest expenditure on the income statement. The item will be reversed by debiting the account for accrued interest and crediting cash when the business pays the interest in January.

In order to assess a company's profitability and liquidity, accrued expenses must be taken into account. By tracking accrued expenses, a business can more properly match its revenues and costs, preventing the understatement of liabilities and overstatement of net income. While accrued costs are brought back to the net income in the operational activities section using the indirect method, they have an impact on the cash flow statement as well.