What Are Accrued Expenses?

If you've seen the term "accrued expenses" on a financial statement and weren't quite sure what it meant, you're not alone — it's one of those accounting terms that sounds more complicated than the concept actually is.

In plain terms: an accrued expense is a cost your business has incurred but hasn't paid yet. The expense happened — the work was done, the service was used — but the cash hasn't left your account, and often no bill has even arrived yet.

A simple example: say your employees work the last two weeks of December, but payday isn't until January 3rd. Under accrual accounting, that payroll expense gets recorded in December — because that's when the work was actually done — even though the cash doesn't go out until January.

Other common examples of accrued expenses:

• Utility bills for services used but not yet billed

• Interest on a loan that's accumulating but not yet due

• Contractor work completed but not yet invoiced or paid

Why this matters: accrued expenses are part of what makes accrual-basis accounting give a more accurate financial picture than cash-basis accounting. Without accruals, your books might show a great month simply because a big expense hadn't been paid yet — not because the business actually performed well.

The takeaway: accrued expenses exist to match expenses to the period they actually belong to, rather than the period the cash happens to move. It's a small concept that makes a real difference in how accurately your financial reports reflect your business's true performance.