Expense recognized before payment because the cost has already been incurred in the current period.
An accrued expense is a cost that has already been incurred even though the bill has not yet been paid, and sometimes has not yet been invoiced. Under accrual accounting, the expense belongs in the current period, so the business records both the expense and the related liability. Older materials may also call this an accrued liability, accrued charge, or simply an accrual.
Accrued expenses are a major part of period-end accuracy. If they are missed, profit is overstated and liabilities are understated. If they are duplicated, the opposite problem appears.
Typical accrued expenses include wages earned but unpaid, interest that has accumulated, utilities used before billing, and professional fees incurred before invoice receipt. These amounts are often estimated at period end, then reversed or cleared when the actual invoice or payment arrives.
Employees earn 6,000 of wages before month end, but payroll will run in the next month:
| Account | Debit | Credit |
|---|---|---|
| Wage Expense | 6,000 | |
| Wages Payable | 6,000 |
That entry puts the cost in the correct reporting period even though cash has not moved yet.
An accrued expense is not the same as accounts payable. Accounts payable usually starts with an approved supplier invoice. Accrued expenses often exist before that invoice arrives. It is also the opposite timing pattern from a prepaid expense.