What Are Accrued Expenses?

Definition and Examples of Accrued Expenses

Accrued expenses, such as accounts payable, are costs your business has incurred for goods and services but for which you have not yet been billed. Because the bill (or payment date) has not arrived, no money has yet changed hands.

It’s key to separate accrued expenses from accounts payable. While both represent money that will be spent, they are not identical. Accounts payable are short-term expenses that must be paid because an invoice has been submitted. Accrued expenses are costs that are known to exist even though no invoice has yet been submitted.

Common examples of accrued expenses are regular and recurrent costs such as rent, electricity, and wages. Currently, with digital transformation, another category has been added to recurrent costs, which is the subscriptions to digital platforms for basic business needs such as cloud storage with the likes of Amazon, Azure, or Oracle, flies storage and management with Dropbox, Google or Box, Design with Canva or Adobe, appointment management with Calendly, work collaboration with Slack....etc. All these require annual and monthly subscriptions that involve regular and recurrent payments.

Your company gets the benefit of space, heat, and employee labor for up to a month before you receive an invoice or pay for them. If you are using an accrual method of accounting, you’ll record those expenses as you receive the benefits you’ll be paying for. If you’re using a cash method of accounting, however, you won’t record those expenses until cash goes out the door to pay for them.

Another example of accrued expense is a product or service that already has arrived and been used before it’s been invoiced or paid for; for example, a repair is made to your printer, but no invoice has yet been sent for the repair work. Of course, you owe the repair shop money regardless of whether the invoice has arrived, so the repair is an accrued expense.

How Accrued Expenses Work

If you’re a large U.S. publicly traded corporation, you’re required to use the accrual accounting method and show your accrued expenses at all times. This requirement is part of the federally mandated Generally Accepted Accounting Principles, known as GAAP, and it’s considered an important way to maintain ethical accounting practices.

If you’re a small private business, however, GAAP doesn’t apply, so you can choose between showing or not showing your accrued expenses in your financial records.

Imagine you run a small business that sells jewelry from a storefront. You have a store manager who is paid $2,000 at the end of each month, a cleaning service that forgets to bill you but charges $200 per month, and a $150 electricity bill coming soon. Your jewelry maker shipped you an order valued at $1,000, but the invoice got lost in the mail. All of these are accrued expenses.

If you use the cash method of accounting, you will have entered none of these expenses into your accounting software. After all, no money has changed hands yet. This keeps things simple, but it also suggests you have an extra $3,350 available—which you might spend without realizing it’s already been spent. If you use the accrual accounting method, you will have accounted for all those expenses before they are paid out.