Accrued Expenses: The Journal Entry and a Two-Period Example

Accrued expenses are costs a business has already incurred but has not yet been invoiced for at the end of a reporting period. You recognise the cost in the period the goods or services were received and park the offsetting amount on the balance sheet as a current liability, which clears once the supplier invoice arrives.

For a controller this is no bookkeeping formality. Without accruals the monthly result follows the mailroom rather than the business: one month carries two electricity invoices and the next carries none. Every margin comparison becomes unreliable, and any variance you set out to explain may turn out to be nothing more than a timing difference.

What are accrued expenses?

The accrual belongs to the matching principle: costs are reported in the period in which the related goods or services were consumed, regardless of when the supplier invoice is dated or settled. IFRS and local GAAP frameworks both make that principle mandatory for statutory reporting, and it is the reason the balance sheet carries a separate accruals and deferred income line.

Several terms cover the same thing. An accrued expense is also called an accrued liability or simply an accrual, and the overarching term for all four categories is accruals and deferrals. What matters is the distinction from a provision: an accrual covers a performance that has definitely taken place and only lacks paperwork, while a provision covers an obligation whose amount or timing is still uncertain. That distinction drives both where the item sits on the balance sheet and how much disclosure it requires.

Accruals and deferrals: the four categories

Every item answers two questions. Did the performance happen before or after the invoice, and does it concern a cost or revenue? That gives four categories, two on each side of the balance sheet.

Category	What happened	Balance sheet	Example
Accrued expenses	Service received, invoice not yet in	Current liability	Electricity, audit fees, bonuses
Deferred revenue	Invoiced or collected, delivery still to come	Current liability	Annual subscription billed in January
Prepaid expenses	Paid or invoiced, service still to come	Current asset	Annual insurance premium paid in January
Accrued revenue	Delivered, not yet invoiced	Current asset	December hours, invoiced in January

Accrued expenses vs prepaid expenses

The two are mirror images, and mixing them up reverses the result for two consecutive periods. With accrued expenses the cost runs ahead of the invoice, so you add a liability. With prepaid expenses the invoice runs ahead of the cost, so you add an asset and release it over time.

Take an insurance premium of € 24.000 paid in January for twelve months. January does not carry a cost of € 24.000 but a prepayment; each month releases € 2.000 to the insurance line, leaving a nil balance in December. The same pattern applies to rent, licences and maintenance contracts paid in advance.

How to record accrued expenses: the journal entry

Journal entry = debit the expense account, credit accrued liabilities

1. Set the period by the performance, never by the invoice date. The question is when the goods or services were actually delivered or consumed.
2. Establish the amount. With no invoice to hand, support the estimate with the contract, the rate card, a meter reading or the previous settlement, and store that support alongside the entry.
3. Debit the expense in the correct period and credit a dedicated accruals account, not accounts payable.
4. Reverse the entry in the following period, or let the incoming invoice clear the accruals account. Pick one method and hold to it: using both in parallel double-counts the cost.
5. Reconcile the balance. Every accruals account must be specifiable line by line at any moment. A residue nobody can allocate is always either a forgotten reversal or a duplicate.

That last step is where the actual work sits. In Smartbooks you right-click the balance sheet row and select Transactions; the journal entries for that account and period appear with date, GL account, counterparty, description and amount, together with the underlying document when the source system holds one. Corrections that belong at group level only can go into a manual company without touching the source administration.

Worked example across two periods

A company consumes electricity in November, but the settlement only arrives in mid-December. The meter-based estimate is € 12.000; the actual invoice comes to € 12.750.

Period	Entry	Debit	Credit
November	Electricity costs (4300)	€ 12.000
November	Accrued liabilities (1800)		€ 12.000
December	Accrued liabilities (1800)	€ 12.000
December	Electricity costs (4300)	€ 750
December	Accounts payable (1600)		€ 12.750

The accruals account returns to nil after December and the € 750 shortfall lands as a late cost in that month. The effect on the profit and loss statement per month:

Electricity costs	No accrual	With accrual
November	€ 0	€ 12.000
December	€ 12.750	€ 750
Total	€ 12.750	€ 12.750

Across both months the outcome is identical. That is the whole point: accruing changes nothing about annual profit, only whether the monthly figures mean anything. In the cash flow statement the November charge stays outside operating cash flow, since nothing has been paid; the movement in accrued liabilities is the correcting amount there.

When to accrue and when to let it go

No statutory threshold exists. The test is materiality: would leaving the item out change the conclusion a reader draws from the report? In practice finance teams set a fixed floor per item, often somewhere between half a percent and a few percent of the monthly result, and where that floor sits depends heavily on the size and the volatility of the cost base. Document the threshold and apply it the same way every month; a floor that shifts per close destroys comparability across the series.

Three types of item almost always warrant an accrual: large costs that arrive at irregular intervals, revenue around the period end, and anything related to payroll. Skipping the entry is defensible for small recurring amounts of roughly equal size, because last month's accrual offsets this month's. That logic holds during a soft close with a stable cost pattern, and breaks in the month the pattern changes. Which closing method fits is covered in the article on month-end closing.

Pitfalls

• Accruing on the invoice date. The invoice date is an administrative artefact; the delivery date is a fact. For continuous services around a period end the two almost never coincide.
• Forgetting the reversal. The cost then hits the result twice and the accruals balance climbs every month. This is the single most common cause of an unexplained residue on a balance sheet line.
• Using one catch-all account. Keep accrued liabilities, prepayments and late costs on separate accounts. A single collective account stops being specifiable past about ten entries.
• Never revisiting the estimate. If the real invoice is structurally higher than the accrual, that is not an incident but a systematic understatement of the monthly cost.
• Ignoring the other side within a group. If one entity accrues a cost and the counterparty fails to accrue the matching revenue, the intercompany position no longer balances and the difference surfaces during consolidation.

Frequently asked questions

What is the journal entry for accrued expenses?

Debit the relevant expense account and credit a dedicated accrued liabilities account in the period the service was received. In the next period you either reverse that entry or let the incoming supplier invoice clear the liability account, so the accrual balance returns to nil.

What is the difference between accrued expenses and accounts payable?

Both are current liabilities, but accounts payable rests on a received invoice with a known amount and due date, while an accrual rests on an estimate because the invoice has not arrived. Once the invoice comes in, the amount moves from accrued liabilities to accounts payable.

Are accrued expenses an asset or a liability?

A liability. The business has consumed something it still has to pay for, so the obligation sits on the credit side under current liabilities. Prepaid expenses are the mirror image and sit on the asset side.

Do accrued expenses affect cash flow?

Not directly. No payment has been made, so operating cash flow stays unchanged in the period of the accrual. Under the indirect method the increase in accrued liabilities is added back to the result, and the cash outflow shows up in the period the invoice is settled.

Accruing becomes routine once the threshold is fixed, the accounts are separated and the reversal is an agreement rather than something to remember. As long as every close reopens the same discussion, it costs the same day each month. How these items feed into the annual report is covered in preparing financial statements; more professional articles sit in the knowledge center.