Quick answer: How do you record accrued expenses?
On the last day of the month, debit the expense for anything you have used but not yet been invoiced for, and credit an accrued liability — an honest estimate is fine. On the first day of the next month, reverse the entry, then enter the genuine bill or payroll as usual when it comes. The cost sits in the month that used it, the balance sheet shows the debt, and any estimating gap lands as a small adjustment in the new month.
A neighbourhood bakery runs its ovens hard all October. Two days of hourly shifts fall after the last payday. A freelance designer finishes new packaging artwork but hasn’t sent an invoice. By the bank statement, October was cheaper than it really was — and November is about to look expensive for costs it didn’t cause.
That’s the gap accruals close. Below is how to record accrued expenses from start to finish: spotting them at month end, the single entry that books them, the reversal that follows, what to do when the real bill doesn’t match your estimate, and how to handle annual costs that build up every month. The bakery’s October 31 close is the worked example.
Accrued Expenses in One Idea: You’ve Used It, Nobody’s Billed You Yet
On the accrual basis a cost belongs to the period that consumed it, not the period the paperwork turned up. If the bakery used $910 of gas and electricity in October, that’s an October cost — even if the utility bills it on November 14. An accrual is simply the entry that puts it there. For the two-sided mechanics, double-entry bookkeeping explained is a short read; for which basis you’re on, see cash basis or accrual basis.
not yet invoiced
to book them
settled in November
Where do accrued expenses appear in the financial statements?
In two places at once. The cost lands on the profit and loss statement for the month it was used, and the unpaid amount sits under current liabilities on the balance sheet, typically as “Accrued liabilities”. Think of it as the reverse of a prepaid expense: there the cash leaves first and you hold an asset; here the benefit arrives first and you hold a debt.
Which costs usually need accruing?
| Cost | Why the paperwork lags | Credit this account |
|---|---|---|
| Hours worked after the last payday | Paid on the next pay run | Accrued Wages Payable |
| Energy, water, phone used this month | Billed in arrears | Accrued Liabilities |
| Freelancer or contractor work completed | Invoice still to come | Accrued Liabilities |
| Interest on borrowing since the last instalment | Paid with the next instalment | Interest Payable |
| Year-end accounting fee, property tax, staff bonus | One payment covers the whole year | Accrued Liabilities |
How to Record Accrued Expenses at Month End
October 31. The bakery’s owner works through the list and finds three costs with no bill behind them:
- Hourly wages for October 30–31: $2,600, to be paid on the November 7 pay run.
- Gas and electricity for October, billed around November 14. The last three bills average roughly $900, so she books $910.
- Packaging design: the designer delivered the final artwork on October 28 for an agreed $1,200 fee; no invoice yet.
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | $2,600.00 | |
| Utilities Expense | $910.00 | |
| Design & Marketing Expense | $1,200.00 | |
| Accrued Wages Payable | $2,600.00 | |
| Accrued Liabilities | $2,110.00 | |
| Totals | $4,710.00 | $4,710.00 |
Nothing touched the bank. October now carries $4,710 of cost it genuinely incurred, and the balance sheet admits the bakery owes it. This is the accrued-cost pattern from our guide to adjusting journal entries, and it belongs in every month-end routine for accrual-basis books.
Don’t wait for precision. A sensible estimate — recent bills, timesheets, an agreed quote — beats leaving the month short. Jot down how you got the figure; next month’s estimate takes half the time.
Day One of the New Month: Reverse It
Should every accrual be reversed?
The one-off, “bill is on its way” kind — yes. On November 1 the bakery posts the mirror image: debit Accrued Wages Payable $2,600 and Accrued Liabilities $2,110; credit Wages Expense $2,600, Utilities Expense $910 and Design & Marketing Expense $1,200. The liabilities drop to nil, and November’s expense lines open with small credit balances waiting for the real documents.
Then everything is entered exactly as it normally would be. The November 7 payroll is recorded in full (our payroll journal entries guide shows the split), and the utility and designer invoices go through the usual accounts payable process. Nobody entering bills needs to know an accrual ever existed — that’s the whole appeal.
What happens if the real bill differs from the accrued amount?
The energy bill arrives at $887, not $910. Entered normally, it debits Utilities Expense $887. Against the $910 credit from the reversal, November shows a net credit of $23 — the estimate was a touch high, and the correction falls into the month you learned about it. That’s standard treatment for small differences; October stays closed.
The no-reversal alternative: when the $887 bill comes in, post $910 against Accrued Liabilities and $23 as a credit to Utilities Expense. It reaches the same place, but only if whoever enters the bill remembers it was accrued — which is precisely the memory test reversals remove.
Annual Costs That Build Up Every Month
The bakery’s accountant charges $3,000 for year-end accounts and the tax return, invoiced each January. Booking it all in January makes that month look dreadful and the other eleven flattering. Instead, accrue $250 each month: debit Accounting Fees, credit Accrued Liabilities. By December 31 the liability holds $3,000; January’s invoice is posted against it, and January’s profit isn’t touched.
These build-up accruals are not reversed — each month adds the next slice until the bill clears the balance. Property tax, annual bonuses and annual licence true-ups follow the same shape.
Accrued Expenses vs. Accounts Payable
How are accrued expenses different from accounts payable?
| Accrued expenses | Accounts payable | |
|---|---|---|
| Supplier invoice? | Not yet | In hand |
| Figure | Frequently estimated | Exact |
| Entered as | Period-end journal entry | Supplier bill |
| Balance sheet line | Accrued liabilities | Accounts payable |
Both are debts the business owes; the difference is whether the paperwork exists. If you already hold the invoice at month end, skip the accrual and simply date the bill in the right month.
Where Accruals Usually Go Wrong
- No reversal. The accrual stays, the real bill joins it, and the cost is booked twice.
- Accruing what’s already billed. Check open supplier bills first, or you double-count from the other side.
- Payroll costs left out. Employer payroll taxes on accrued wages are an accrued cost too; for small sums, many owners accrue gross wages only and note the choice.
- Accruals in cash-basis books. If you run the cash basis, they don’t belong there.
- A liability that only grows. If Accrued Liabilities climbs every month, something is being accrued and never cleared.
Five-minute month-end proof: list each open accrual with its amount and reason, total it, and compare with the accrued liability accounts. They should match to the cent. With reversals in place, the only balances carried between months should be build-up accruals like the year-end fee.
How Kantivo Handles Accrued Expenses
- Accruals and reversals post as journal entries in a true double-entry ledger with a full audit trail; an entry that doesn’t balance doesn’t post.
- Auto-Accruals runs build-up accruals for you. Choose Accrued Expense, pick the expense and liability accounts, enter the total, the number of periods and a start date, and Kantivo calculates the monthly amount and queues each entry as it falls due.
- One screen at month end. The Pending Entries tab gathers every scheduled accrual, prepaid release and deferred revenue release that’s due, ready to post together as Adjusting Entries.
- Closed months stay closed. With a period locked, a scheduled entry dated inside it is held back and flagged rather than posted.
- Cash or accrual reporting from the same books, so the accrual view for your lender and the cash view for your own planning come from one set of entries.
Book the Cost When It Happens
Month-end accruals, day-one reversals and build-up schedules in one double-entry ledger. Desktop accounting at one flat annual price — not a monthly bill that grows at every renewal.
Start Free 30-Day Trial Try Live DemoFrequently Asked Questions
What is the journal entry for an accrued expense?
On the last day of the period, debit the relevant expense account and credit an accrued liability account for the cost you have used but not yet been invoiced for. An estimate is acceptable when the exact figure is unknown. On the first day of the following period, reverse the entry, and enter the genuine invoice or payroll in the usual way once it arrives.
Where do accrued expenses appear in the financial statements?
In two places. The cost shows on the income statement of the month the business used it, and the amount still owed sits under current liabilities on the balance sheet, normally labelled accrued liabilities or accrued expenses. The liability clears when the bill is entered or paid.
How are accrued expenses different from accounts payable?
Accounts payable holds amounts on supplier invoices you have in hand, so the figures are exact. Accrued expenses hold amounts for goods or services already received where no invoice exists yet, so they are frequently estimates. Once the invoice turns up, the debt effectively moves from accrued liabilities into accounts payable.
What happens if the real bill differs from the accrued amount?
If you reversed the accrual on day one, nothing extra is needed. The reversal and the real bill net to the difference between the estimate and the actual amount, and that small gap falls into the new month. Prior months are not reopened for immaterial differences.
Should every accrual be reversed?
No. One-off month-end accruals for a bill that is about to arrive are normally reversed. Accruals that build up month after month toward a single annual payment, such as a year-end accounting fee or property tax, are left in place and cleared when the payment is made.
Do I need to accrue expenses if I use cash-basis accounting?
No. Cash-basis books record a cost only when it is paid, so accruals have no place in them. Accruals belong to accrual-basis accounting, which GAAP statements require and which lenders and investors usually expect to see.
Where This Leaves You
The principle is short: a cost belongs to the month that used it, whether or not the invoice has turned up. List what you consumed without paperwork, book it on the last day with a fair estimate, reverse it on the first, and let the real documents flow in as usual. Your monthly profit stops tracking the post, and your balance sheet stops hiding what you owe.
Related Articles
- How to Record Prepaid Expenses So Each Month Carries Its Own Cost
- Adjusting Journal Entries, Explained: What to Post Before You Close the Month
- How to Close Your Books Every Month: A Small Business Month-End Routine
- How a Supplier Bill Should Move Through Your Books: The Accounts Payable Process
- How to Record Payroll: The Payroll Journal Entries Every Small Business Needs
- Cash Basis or Accrual Basis? A Small Business Owner's Guide to Picking the Right Method
- Recording a Business Loan: The Entries From Funding Day to Final Payment
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