Accrued expenses, also known as accrued liabilities, refer to expenses that are recognized on the books before they have been paid. The expense is recorded during the period in which it is incurred, rather than when it is paid.
The Basics
Since accrued expenses are a company's obligation to make a cash payment in the future, they are listed on the balance sheet under current liabilities.
An accrued expense value can either be from an invoice that will be paid at a later date or an estimate. This all falls into a company following the accrual method of accounting, where all expenses are recognized when they are incurred, not necessarily when they are paid.
Accrual vs. Cash Basis Accounting
Accrual accounting differs from cash basis accounting because of the time in which financial transactions are recorded. With cash basis accounting, transactions are recorded only when the cash is exchanged, which could lead to the over or under-stating of income and account balances.
Although the accrual method of accounting can be a bit more labor intensive with its more demanding bookkeeping, it tends to yield more accurate results for a company through each period.
Accrued Expenses vs. Prepaid Expenses
Accrued expenses are the opposite of prepaid expenses. Prepaid expenses are made in advance for goods and services that will be provided in the future. While accrued expenses are liabilities, the prepaids are considered assets when it comes to the balance sheet.
In comparison, an accrued expense is an event in which the company has already received the benefit, but still needs to remit payment for the goods or services. Essentially, it is the opposite of a prepayment.
Advantages & Disadvantages
Accrued expenses come with some pros and cons. On the positive side of things, accrued expenses help keep the books more aligned with business operations, make financial reports more consistent, and may yield more useful information for management. On the downside, they require more time and resources compared to the cash basis of accounting and can sometimes further complicate reporting if not logged properly.
Need a Hand?
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