Quick answer: How do you record accrued expenses?
At month end, debit the expense for costs you have incurred but not yet been billed for or paid, and credit a liability such as Accrued Liabilities, Accrued Wages Payable or Interest Payable — using a reasonable estimate if needed. On the first day of the next month, post a reversing entry, then record the real bill or payroll normally. The expense lands in the month you used it, and the balance sheet shows what you owe.
Your crew worked the last two days of October. The electric meter ran all month. Your loan quietly built up a month of interest. None of it has hit your bank account or your bills folder yet — and if you only record costs when paper arrives, October looks more profitable than it was and November looks worse.
This guide explains how to record accrued expenses so each cost lands in the month it was actually incurred: the month-end accrual entry, the reversing entry that follows it, what to do when the real bill doesn’t match your estimate, and how accrued expenses differ from accounts payable. One example runs throughout: Harbor Line Plumbing, a six-person service company closing its books for October 31.
What Is an Accrued Expense?
An accrued expense is a cost your business has already incurred — you’ve used the service, the employee has done the work, the interest has built up — but that you haven’t been billed for or paid by the end of the period. Under accrual-basis accounting, an expense belongs to the period that consumed it, regardless of when the invoice shows up. Accruing it is how you get it there.
with no bill yet
on October 31
by the entry
Is an accrued expense a liability or an expense?
Both, recorded at the same moment. The debit puts the cost on the profit and loss statement for the month you used it; the credit puts what you owe on the balance sheet as a current liability. Accrued expenses are the mirror image of prepaid expenses: with a prepaid you pay first and use later, so it starts as an asset; with an accrual you use first and pay later, so it starts as a liability.
What are common examples of accrued expenses?
| Accrued expense | Why there’s no bill yet | Liability account |
|---|---|---|
| Wages earned but not yet paid | Pay period ends after month end | Accrued Wages Payable |
| Loan interest since the last payment | Payment due next month | Interest Payable |
| Utilities used this month | Bill arrives mid-next month | Accrued Liabilities |
| Contractor or professional fees for work done | Invoice not sent yet | Accrued Liabilities |
| Property tax, annual bonuses, year-end audit fee | Paid once a year, incurred monthly | Accrued Liabilities |
How to Record Accrued Expenses: The Month-End Entry
On October 31, Harbor Line identifies three costs that belong to October but have no bill or payment behind them yet:
- Wages: the last payroll covered work through October 28. Hourly wages for October 29–30 total $3,800, payable on the November 6 payday.
- Loan interest: a $60,000 equipment loan at 7.5% builds up $375 of interest a month, paid with the November 1 installment.
- Electricity: the October bill won’t arrive until about November 12. Based on recent months, the owner estimates $640.
One adjusting entry records all three:
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | $3,800.00 | |
| Interest Expense | $375.00 | |
| Utilities Expense | $640.00 | |
| Accrued Wages Payable | $3,800.00 | |
| Interest Payable | $375.00 | |
| Accrued Liabilities | $640.00 | |
| Totals | $4,815.00 | $4,815.00 |
No cash moved. October’s profit is now $4,815 lower — and correct — and the balance sheet shows $4,815 the company owes. This is the first of the five classic adjusting journal entries, and it belongs on every month-end close checklist for an accrual-basis business.
Estimates are fine. You don’t need the exact figure to accrue. A reasonable estimate — last month’s bill, the timesheets, the loan’s interest rate — is far more accurate than recording nothing. Write down how you arrived at it so the next close is faster.
The Reversing Entry on Day One of the Next Month
Why do accrued expenses get reversed?
Because the real bill is coming, and you don’t want to count the cost twice. On November 1, Harbor Line posts the exact opposite of the October 31 entry:
| Account | Debit | Credit |
|---|---|---|
| Accrued Wages Payable | $3,800.00 | |
| Interest Payable | $375.00 | |
| Accrued Liabilities | $640.00 | |
| Wages Expense | $3,800.00 | |
| Interest Expense | $375.00 | |
| Utilities Expense | $640.00 | |
| Totals | $4,815.00 | $4,815.00 |
The liabilities are back to zero and November’s expense accounts start with small credit balances. Now everything gets entered the normal way: the November 6 payroll is recorded in full, the loan payment is split between principal and interest as usual (see how to record a business loan), and the electric bill is entered as a vendor bill when it arrives.
What if the actual bill is different from the accrual?
It usually is, and the reversal handles it automatically. The October electric bill arrives at $655, not $640. Entered normally, it debits Utilities Expense $655. Combined with the $640 credit from the reversal, November carries a net $15 — the estimating error, absorbed in the month you discovered it. That’s accepted practice for immaterial differences; no one reopens October for fifteen dollars.
Not reversing? That works too, as long as you’re consistent. When the $655 bill arrives, code $640 of it against Accrued Liabilities and the remaining $15 to Utilities Expense. Same result, but whoever enters bills has to remember which ones were accrued — which is exactly what reversing entries spare you.
Recurring Accruals: Costs Paid Once, Incurred Every Month
Some costs build up evenly all year but are paid in one lump. Harbor Line’s business property tax is $7,200, billed and paid in December. Without an accrual, December carries the whole year’s tax and the other eleven months look $600 better than they really were.
The fix is a monthly accrual of $600: debit Property Tax Expense, credit Accrued Liabilities. By December the liability holds $7,200, and the payment simply clears it (debit Accrued Liabilities, credit Cash) with no expense hitting December beyond its own share. These accruals are not reversed — each month adds the next slice until the bill is paid. The same pattern fits year-end bonuses, annual audit or tax-preparation fees, and annual software true-ups.
Accrued Expenses vs. Accounts Payable
What is the difference between accrued expenses and accounts payable?
| Accrued expense | Accounts payable | |
|---|---|---|
| Invoice received? | No | Yes |
| Amount | Often an estimate | Exact, per the bill |
| How it’s recorded | Adjusting journal entry at period end | Vendor bill in your AP process |
| Balance sheet | Current liability (Accrued Liabilities) | Current liability (Accounts Payable) |
| Typical items | Wages, interest, unbilled utilities | Supplier invoices, rent bills |
Both are debts. The difference is paperwork: once the vendor’s invoice arrives, the obligation moves out of accrued liabilities and into accounts payable. If you already have the bill on October 31, don’t accrue it — just enter the bill with an October date.
Common Mistakes With Accrued Expenses
- Forgetting the reversal. The accrual stays on the books, the real bill gets entered too, and the cost is counted twice.
- Accruing a bill you already entered. Same double count, from the other direction. Check open bills before you accrue.
- Accruing in a cash-basis company. If your books are cash basis, accruals don’t belong in them at all.
- Accrued wages without payroll taxes. The employer’s share of payroll taxes on accrued wages is also an accrued expense; for small amounts many businesses accrue gross wages only and note it. Our guide to payroll journal entries shows where those taxes go.
- A liability balance nobody can explain. If Accrued Liabilities grows month after month, something is being accrued and never cleared.
The month-end tie-out: list every open accrual with its amount and reason. The total should equal your accrued liability accounts exactly. If you reverse accruals each month, the balance before the new month-end accrual should be zero, apart from recurring accruals like property tax that are still building.
How BizBooks Pro Handles Accrued Expenses
BizBooks Pro runs GAAP-compliant double-entry bookkeeping on your own computer, so every accrual is a balanced entry that hits the right expense and the right liability — an entry that doesn’t balance doesn’t post.
- Month-end accruals and reversals as journal entries, with a full audit trail of who posted what and when.
- Auto-Accruals schedules for recurring accrued expenses like property tax or annual fees: set the expense account, the liability account, the total and the number of periods, and BizBooks Pro works out the monthly amount and lists every entry that falls due, ready to post at month end. The same tool handles prepaid expenses, deferred revenue and accrued revenue.
- Period locking so a closed month can’t be changed by accident; scheduled accruals dated in a locked period are held back and flagged rather than posted.
- Cash or accrual reporting from the same books, so you can view accrual-basis statements for management and lenders without re-entering anything.
Put Every Cost in the Right Month
Accruals, reversals, recurring schedules and period locks in one double-entry ledger — desktop accounting at one flat annual price, not a monthly fee that climbs every renewal.
Start Free 30-Day Trial Try Live DemoFrequently Asked Questions
How do I record an accrued expense?
At the end of the month, debit the expense account for the cost you incurred and credit a liability account such as Accrued Liabilities, Accrued Wages Payable or Interest Payable. Use the best available estimate if the exact amount is not known yet. On the first day of the next month, post the opposite entry to reverse it, then record the real bill or payroll normally when it arrives.
Is an accrued expense a liability or an expense?
Both. The accrual entry records an expense on the income statement for the period you used the goods or services, and a liability on the balance sheet for the amount you owe but have not been billed for or paid. Accrued expenses are usually current liabilities because they are settled within weeks or months.
What is the difference between accrued expenses and accounts payable?
Accounts payable is money owed on a vendor bill you have actually received. An accrued expense is money owed for something you have used but have not been invoiced for yet, so the amount is often an estimate. When the invoice arrives, the obligation moves from accrued liabilities to accounts payable.
Why do accrued expenses get reversed?
A reversing entry on the first day of the next month cancels the accrual, so the real bill or payroll can be entered the ordinary way without counting the cost twice. The reversal and the actual bill net to the difference between your estimate and the true amount, which lands in the new month as a small correction.
What are common examples of accrued expenses?
Wages earned by employees but not yet paid at month end, interest owed on a loan since the last payment, utilities used but not yet billed, contractor or professional fees for work already done, and annual costs such as property tax or year-end bonuses that build up monthly but are paid once.
Do cash-basis businesses record accrued expenses?
No. Under cash-basis accounting an expense is recorded only when it is paid, so there is nothing to accrue. Accrued expenses are an accrual-basis concept and are required for GAAP financial statements. Many small businesses keep accrual books for management and lenders while filing taxes on a cash basis.
The Bottom Line
The rule fits in a sentence: if you used it this month, it’s this month’s expense — whether or not the bill has arrived. Accrue it at month end with your best estimate, reverse it on day one, and let the real bill land normally. Do that every month and your monthly profit stops swinging with the mail, and your balance sheet finally shows everything you owe.
Related Articles
- How to Record Prepaid Expenses (Journal Entries + Amortization Schedule)
- Adjusting Journal Entries: The 5 Types, With Worked Examples
- The Month-End Close Checklist for Small Business (8 Steps, In Order)
- The Accounts Payable Process: 7 Steps for Small Business
- Payroll Journal Entries: How to Record Payroll in Your Books (With Examples)
- Cash vs. Accrual Accounting for Small Business: Which Should You Use?
- How to Record a Business Loan in Accounting (Journal Entries + Amortization)
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