Accrued Expense

An accrued expense is a cost you have incurred but not yet been invoiced or paid for, recorded now with a liability for the amount owed. It is how a set of books stops a late supplier invoice from making this month look better than it was and next month look worse.

The Mechanic

You use something in March. The invoice arrives in April. The cost belongs to March, because that is when you consumed it.

So at the end of March you record the expense and a corresponding liability — accrued expenses or accruals — for the amount owed. When the invoice arrives, it clears the liability rather than creating a fresh cost.

That second part is where it goes wrong, and it is worth stating plainly: if the accrual is not reversed or matched when the invoice lands, the cost is recorded twice. See reversing entry.

Where It Shows Up

Utilities and telecoms, billed in arrears.

Payroll spanning a month end — days worked in one month, paid in the next. Often the largest accrual a small business has.

Subcontractor work completed and not yet invoiced, which in construction and trades is routine and material.

Professional fees for work already performed.

Interest accruing on a loan between payment dates.

Bonuses and commissions earned in a period and paid later.

What Goes Wrong

Double counting. The accrual is made and the invoice is also expensed. The commonest accrual error by a long way.

Accruals that never move. A standing accrual at the same round figure for two years is not an estimate; it is a plug.

Accruing only the convenient ones. Accruing utilities and not subcontractors, in a business where subcontractors are the bigger number, achieves very little.

Confusing accrual with payable. An accrual is for a cost incurred with no invoice yet. Once the invoice exists, it belongs in accounts payable. Keeping both for the same item double-counts the liability.

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