What is an accrued expense?
Quick answer
An accrued expense is a cost a business has already incurred but has not yet paid or received a bill for by the end of an accounting period. Under accrual accounting it is recorded as an expense and a liability in that period, so the books show the cost in the month it actually happened.
Last updated
Updated · By Robert Breen
Why it matters for a small business
Bills arrive late. Goods delivered on the 28th might not be invoiced until the 5th of next month. If you wait for the paper, this month looks cheaper than it was and next month looks worse. Recording an accrual at month-end puts the cost where it belongs and keeps profit from swinging for reasons that have nothing to do with the business.
Common accruals are wages earned but not yet paid, utilities used but not yet billed and goods received with no invoice yet. Once the real bill shows up, it moves into accounts payable and the accrual is reversed. How far to go is a judgment call, and businesses on a cash basis may not accrue at all, so your accountant should set the rules for your books.
In a real lesson: Build an AI Vendor Follow-Up Agent in n8n
Stepthrough has no lesson that books accruals. The closest is the AI Vendor Follow-Up Agent lesson, where you build an agent for Ridgeline Supply Co., a made-up warehouse business that buys pallets, boxes, stretch wrap and janitorial supplies. It writes follow-ups for open orders and saves them to a Vendor Follow-Ups sheet with Vendor, Order, Issue, Follow-up Message and Due Date.
One test order is "Northwind Wrap, PO 4492, 12 rolls short." That means part of the order did arrive. If those rolls came in before month-end and Northwind has not billed yet, the cost of what was received is a candidate for an accrual.
A sheet of open POs like this one is a useful month-end checklist. For each order, ask: did anything arrive this month that we have not been billed for? Your bookkeeper turns the yes answers into accrual entries.
Try this lesson free or read the step-by-step guide.
Common confusions
Accrued expense vs accounts payable
Both are money you owe. Accounts payable is backed by a vendor bill you have received. An accrued expense is an estimate for a cost with no bill yet.
Accrued expense vs prepaid expense
An accrual is a cost used now and paid later. A prepaid expense is paid now and used later.
Tips
- Before closing a month, list deliveries and services received that have no bill yet.
- Use the PO or a quote to estimate the amount, and note how you got the number.
- Reverse the accrual when the real invoice arrives, so the cost is not counted twice.
Related terms
More Business terms
Where you use it: free lessons
- Build an AI Vendor Follow-Up Agent in n8n (n8n, 12 min)
- Turn a Client Meeting into Action Items and a Follow-Up Email (Accounting Firms) (ChatGPT, 9 min)
More free tutorials
Frequently asked questions
- Is an accrued expense a liability?
- Yes. It is recorded as a current liability, often called accrued liabilities, because the business owes for something it has already received. It clears when the bill is paid or moved to accounts payable.
- What is an example of an accrued expense?
- Employees work the last week of September but are paid on October 3. Those September wages are an accrued expense at September 30. A utility bill for September that arrives in October is another.
- Do small businesses need to record accruals?
- Businesses using accrual accounting should, at least for larger amounts. Businesses on a cash basis record costs when paid. Your accountant can tell you which method you use and what threshold makes sense.