An expense that has been incurred but not yet paid or recorded in the accounts. Recognized under accrual accounting to match expenses with the period in which they were generated.
Understanding Accrued Expense
An accrued expense is a cost that a business has incurred during an accounting period but has not yet paid or recorded. Under accrual accounting, these expenses must be recognized in the period they occur, not when payment is made, to accurately match expenses with the revenue they helped generate.
Common examples of accrued expenses include wages earned by employees but not yet paid (between pay periods), utility bills incurred but not yet received, interest on loans that accumulates daily, and professional service fees for work completed but not yet invoiced.
Accrued expenses are recorded via adjusting journal entries at the end of an accounting period: debit the appropriate expense account and credit an "Accrued Liabilities" account. When the payment is eventually made, the accrued liability is debited and cash is credited.
Why It Matters for Ecommerce
Ecommerce sellers using accrual accounting must record expenses when they're incurred, not when paid. If your warehouse rent is due on the 1st but you're closing books on the 31st, that month's rent is an accrued expense. Missing accrued expenses understates your costs and overstates your profit for the period.
Practical Example
You hire a freelance photographer on December 15 to shoot product images. They complete the work by December 28 but don't invoice you until January 5. For your December books, you accrue the $1,500 expense: Debit "Photography Expense" $1,500, Credit "Accrued Liabilities" $1,500. When you pay in January, you debit the liability and credit cash.
Related Terms
Accrual Accounting
An accounting method that records revenue when earned and expenses when incurred, regardless of when cash actually changes hands. Required by GAAP for most businesses above a certain size threshold.
AccountingAccounts Payable (A/P)
Money a business owes to suppliers, vendors, or creditors for goods or services received but not yet paid for. Recorded as a current liability on the balance sheet.
AccountingPayroll Liability
Amounts a business owes for employee compensation, withholding taxes, benefits, and employer tax contributions that have been incurred but not yet paid. Tracked as current liabilities.
Related Tools
Free PrimeConnect tools related to accrued expense
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