accrued expenses
Expenses that have been incurred but not yet paid or recorded in the accounts, recognized in the period they occur under accrual accounting.
Example
“The December payroll not paid until January was recorded as accrued expenses on the year-end balance sheet.”
Memory Tip
ACCRUED expenses = costs you OWE but haven't paid yet. They've ACCRUED (built up).
Why It Matters
Understanding accrued expenses helps you get an accurate picture of your true financial obligations and profitability. If you only track money you have actually paid out, you might think you are doing better financially than you really are, since you could owe significant amounts that will require payment soon.
Common Misconception
Many people mistakenly believe that accrued expenses are the same as paid expenses or that they do not need to track expenses until the money actually leaves their bank account. In reality, accrued expenses represent real liabilities that you owe, even though the cash payment has not yet been made.
In Practice
A small business receives a utility bill for 500 dollars in December but does not pay it until January. Under accrual accounting, the business records the 500 dollar expense in December when the service was used, not in January when payment occurs. This ensures the December financial statements show the true cost of running the business that month.
Etymology
ACCRUED (accumulated, built up) EXPENSES (costs incurred). Costs that have ACCRUED (piled up) but not yet been paid.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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