What is an accrued expense?

An accrued expense is any ordinary and necessary business cost that has been incurred during a specific accounting period but has not yet been paid by the end of that period. These expenses are recognized when they occur, not when cash changes hands, ensuring expenses are matched to the revenues they help generate. Accrued expenses are recorded as liabilities on the balance sheet and as expenses on the income statement until they are paid.

How to categorize accrued expenses

Record under Operating Expenses on the income statement.
Record a corresponding Accrued Liabilities account on the balance sheet.
Recognize the expense in the period it was incurred, even if no invoice has been received.
Reverse or clear the accrual once the payment is made.
Maintain clear documentation to support the timing and purpose of the expense.

Examples of accrued expenses

Wages and salaries earned by employees but not yet paid.
Interest expenses incurred but not yet billed or paid.
Utilities used during a billing period but invoiced later.
Professional services (legal, accounting, consulting) performed but not yet invoiced.
Taxes owed but not yet due.
Bonuses or commissions earned but paid in a future period.

Tax implications for accrued expenses

Under accrual accounting, accrued expenses are generally deductible in the period they are incurred, not when paid.
Cash-basis businesses typically cannot deduct expenses until payment is made.
Expenses must be ordinary, necessary, and directly related to business operations to be deductible.
Proper accruals help prevent overstating profits or understating liabilities.
Accrued expenses are reported according to the business’s accounting method on Schedule C or business tax returns.