An accrued expense is a liability for a cost a company has already incurred but has not yet paid. In Financial Accounting I, it is recorded with an adjusting entry so the expense lands in the correct accounting period.
An accrued expense is an expense you have already used up, but the cash payment has not happened yet. In Financial Accounting I, that makes it a liability because the business owes money for a past benefit, such as wages earned by employees or interest that has built up on a loan.
The main idea is timing. The company received the good or service first, then pays later. Since the expense belongs to the period when it was incurred, the accountant records it before the bill or paycheck goes out. That is why accrued expenses show up as adjusting entries at the end of the accounting period.
Here is the pattern: debit the expense account and credit a liability account such as wages payable, interest payable, or utilities payable. The debit puts the cost on the income statement for the current period. The credit shows on the balance sheet that the company still owes the amount.
A simple example is wages earned by employees in the last days of December, but paid in January. If the work happened in December, December should carry the wage expense even if the cash leaves the bank in January. Without the adjustment, December net income would look too high and January would look too low.
This is different from cash accounting, where the payment date would drive the entry. Financial Accounting I uses accrual basis accounting, so the focus is on when the obligation is created, not when cash moves. That is what keeps the income statement and balance sheet aligned with the economic activity of the business.
A common mistake is mixing up accrued expenses with accounts payable. Accounts payable usually comes from an invoice already received and recorded. An accrued expense can exist even before the bill arrives, because the company already consumed the service or benefited from the cost.
Accrued expense shows up all over the accounting cycle because it is one of the clearest examples of the expense recognition principle in action. If you can spot an accrued expense, you can explain why an adjusting entry is needed and how it changes both the income statement and balance sheet.
It also connects the two big questions in Financial Accounting I: What did the company earn or use this period, and what does it still owe? The answer affects reported profit, total liabilities, and often working capital. Missing an accrued expense can make a business look more profitable than it really is.
This term is especially useful when you are working with period-end entries, because you have to decide whether the company needs to record wages, interest, rent, or utilities that built up before the books close. That decision is a core part of preparing accurate financial statements, not just a memorized rule.
Adjusting Entries
Accrued expenses are one type of adjusting entry, so they usually appear at the end of the accounting period. When you make the adjustment, you are fixing the timing of recognition, not recording a new business event. That is why accrued expenses are part of the closing process and show up before financial statements are issued.
Accrual Basis Accounting
Accrued expense only makes sense under accrual basis accounting, where revenue and expenses are recorded when they are earned or incurred. Under that system, cash timing does not decide the entry. If a company paid attention only to cash, it could miss costs that belong in the current period.
Unearned Revenue
Unearned revenue is the opposite timing problem. With accrued expense, the company has received the benefit but has not paid yet. With unearned revenue, the company has been paid but has not yet earned the revenue. Both require adjusting entries, but one creates a liability for owing cash, while the other creates a liability for owing performance.
Accrued Revenues
Accrued revenues and accrued expenses are mirror ideas. Accrued revenues are earned but not yet collected, while accrued expenses are incurred but not yet paid. If you can tell which side of the transaction is missing, you can usually decide whether the adjustment affects revenue or expense and whether the related balance sheet account is an asset or a liability.
A quiz or problem set will usually give you a short scenario and ask whether the company needs an accrued expense adjustment. Look for clues like employees have worked but have not been paid, interest has built up, or utilities were used before the bill arrived. Then you identify the expense, pick the liability account, and make the journal entry with a debit to expense and a credit to payable.
You may also be asked to explain how the entry changes the financial statements. The income statement gets the expense in the correct period, and the balance sheet shows the obligation as a liability. If the question is asking for the difference between accrual and cash timing, the safe move is to focus on when the cost was incurred, not when cash is paid.
Accounts payable and accrued expense both create liabilities, but they come from different setups. Accounts payable usually means an invoice has been received and recorded. An accrued expense is recognized before the invoice or bill arrives, because the cost has already been incurred and needs to be matched to the current period.
An accrued expense is a liability for a cost the business has already incurred but has not yet paid.
The adjusting entry records the expense in the period when it happened, which keeps the financial statements accurate under accrual basis accounting.
The usual journal entry is a debit to the expense account and a credit to a payable account.
Common examples include accrued wages, accrued interest, and accrued utilities.
Accrued expense is not the same as accounts payable, because the bill may not have arrived yet.
An accrued expense is a cost a business has already used or incurred but has not yet paid. In Financial Accounting I, you record it as an adjusting entry so the expense appears in the correct accounting period and the unpaid amount shows up as a liability.
The usual entry is debit Expense and credit a liability account such as Wages Payable or Interest Payable. The debit records the cost on the income statement, and the credit shows the amount the business still owes on the balance sheet.
Accounts payable usually comes after a supplier invoice has been received and recorded. Accrued expense is recognized before that invoice arrives, because the service or benefit already happened and needs to be matched to the current period.
Common examples are accrued wages, accrued interest, and accrued utilities. These often build up near the end of a month or year, then get paid in the next period after the books for the earlier period should already be closed.