accrued expense
/ uh-KROOD ek-SPENS /
Think about the electricity humming through your office in late December. You have used the power, but the utility company will not send its bill until mid-January. You owe for something you have already consumed. If you closed the books on 31 December and recorded nothing, your December expenses would be understated and your profit would look better than it really was. An accrued expense is a cost you have incurred but not yet paid or even been billed for.
Under accrual accounting, expenses are recorded when they are incurred — when you use up the benefit — not when cash leaves. So at period end you record an adjusting entry that debits an expense and credits a payable (a liability). If you estimate December's electricity at 600, you debit Utilities Expense 600 and credit Utilities Payable (an accrued liability) 600. When the actual bill is paid in January, you debit the payable and credit Cash, settling the obligation without double-counting the expense. Wages earned by staff but not yet paid, and interest building up on a loan, work exactly the same way.
Accrued expenses are the expense-side twin of accrued revenue and a direct application of the matching principle: the cost of running December belongs in December. They appear on the balance sheet as current liabilities (accrued liabilities) and are among the most common adjustments every business makes. A frequent confusion is mixing them up with accounts payable; accounts payable usually rests on a received invoice, whereas an accrued expense is often estimated before any bill arrives.
Employees earned 2,000 of wages for the last three days of December, payable on the next payroll run in January. Adjusting entry: debit Wages Expense 2,000, credit Wages Payable 2,000. December bears the cost of the work done in December.
Wages incurred in December become an expense plus a liability, even though cash leaves in January.
An accrued expense always creates a liability, not a reduction in an asset. That distinguishes it from using up a prepaid expense, where you already paid in advance and are merely consuming the asset.