Finance term

Accrued Expenses

Also known as: accrued liabilities, accruals, accrued payroll

Definition

Accrued expenses are expenses incurred but not yet paid — wages earned but unpaid at period-end, utilities used but not yet billed, interest accrued but not yet due. They appear as current liabilities on the balance sheet under accrual-basis accounting.

Detailed explanation

Accrual-basis accounting requires matching expenses to the period in which they are incurred, not when cash leaves the account. Accrued expenses are the natural result: payroll accrues daily but is paid biweekly; utility bills accrue throughout the month but arrive 30 days later; loan interest accrues daily but may be due monthly. At any balance sheet date, these incurred-but-unpaid obligations are recorded as current liabilities — accrued expenses or accrued liabilities.

Common accrued expense categories for small businesses: accrued payroll and payroll taxes (wages earned in the last days of the period, paid in the next period); accrued interest (interest on debt accrued through the balance sheet date); accrued rent (if paid in arrears); accrued professional fees (attorney or accountant fees invoiced after the work is done); and accrued warranty obligations.

The balance between accrued expenses and accounts payable is important for cash flow analysis. Accounts payable represents vendor invoices received and due; accrued expenses represent obligations not yet invoiced. Together they form the bulk of current liabilities — used in working capital calculation (current assets − current liabilities) and in the quick ratio.

For lenders, large or growing accrued expenses relative to revenue can signal that a business is deferring payments — running ahead of its ability to pay obligations. Conversely, a business with modest, stable accrued expenses relative to its payroll and operating cycle is managing its short-term obligations well. Accrued expenses are a focus area in SBA 7(a) underwriting when reviewing working capital adequacy.

◈ Worked example

December 31 year-end: employees worked Dec 30-31, paid January 3. Two days of wages → accrued payroll on Dec 31 balance sheet
Term loan interest accrues at $500/day; December 31 interest payment is January 1 → $500 accrued interest on Dec 31
Quarterly utility bill for October–December arrives January 15 → three months of utility expense accrued on Dec 31

Common questions

The most-asked questions about Accrued Expenses — answered straightforwardly.

What's the difference between accrued expenses and accounts payable? +

Accounts payable are obligations with a vendor invoice — you've been billed and owe payment on specific terms. Accrued expenses are obligations that have been incurred but not yet billed (e.g., last week of payroll not yet processed, interest accrued but not yet due). Both are current liabilities, but accrued expenses arise from the matching principle, not from a received invoice.

Do accrued expenses affect my taxes? +

Under accrual-basis accounting for tax purposes, accrued expenses are generally deductible in the year incurred, not the year paid — as long as economic performance has occurred (services rendered, goods received). Cash-basis taxpayers deduct expenses in the year paid; accrual taxpayers deduct when incurred. The tax method must be consistent with your books.

Why do lenders look at accrued expenses? +

Accrued expenses are part of current liabilities — used in working capital and liquidity ratios. A business with surging accrued expenses may be delaying payments (cash management stress). Stable, predictable accrued expenses consistent with the business's operating cycle are normal and expected.

Accrued Expenses

Detailed explanation

Common questions

Further reading

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