Accrued Expense
Also called: accrual, outstanding expense
What is Accrued Expense?
An accrued expense is a cost the business has already incurred but has not yet been billed or paid for — electricity consumed, salaries earned, or interest accumulated at period end.
Why Accrued Expense matters
Leaving accruals out makes a month look more profitable than it was, and dumps the cost into whichever month the bill happens to arrive. Comparisons between months become meaningless.
How Accrued Expense works in practice
At each period end, list costs consumed but not invoiced, post them as accruals, and reverse them when the actual bill arrives. Rent, utilities, salaries and interest are the usual four.
Worked example
March electricity billed in April is accrued in March, so March carries the cost it actually consumed.
Frequently asked questions
An accrual is a known cost awaiting its bill; a provision is an estimate for an obligation whose amount is uncertain.