Expenses that have been incurred but not yet paid or recorded in the accounting books at the end of an accounting period.
Accrued expenses are liabilities recorded at the end of an accounting period for expenses that have been incurred but not yet invoiced or paid. Common examples include salaries earned by employees but not yet paid, interest on loans that has accumulated, and utility bills for the period. Under accrual accounting, these must be recorded to match expenses with the period they relate to, ensuring accurate financial statements.
Employees earn ₹5,00,000 in salaries for the last week of March, but payday falls on April 5. On March 31, the company records ₹5,00,000 as an accrued expense (debit Salary Expense, credit Accrued Salaries Payable).
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Accounts payable are based on received invoices, while accrued expenses are estimated because no invoice has been received yet. Both are current liabilities, but AP has a documented amount while accruals are often estimates.
Without them, financial statements would understate expenses and overstate profit in the period the expense was incurred, violating the matching principle of accrual accounting.
An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.
Money a business owes to its suppliers or vendors for goods and services received but not yet paid for.
A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.
A financial statement that summarizes a company's revenues, costs, and expenses over a specific period to show net profit or loss.
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