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Accounting encyclopedia · Bookkeeping

Accrued expenses

Accrued expenses are costs a business has incurred in a period but has not yet been invoiced for or paid, such as wages earned by staff, interest on a loan or a utility bill that has not arrived. Under accrual accounting they are recorded in the period they relate to, and they sit on the balance sheet as a current liability until settled.

Sora Accounting & Tax · General information · Editorial policy
Updated · 3 min read

Costs build up before the bill arrives

An accrued expense records a cost in the period it was incurred, even when the invoice or payment follows in the next period.

Visual labels: Work or service used; Year-end cutoff; Invoice or payment later.

Why the cost belongs to the period, not the payment date

Many costs build up before anyone sends a bill. Employees earn wages every day but are paid on a schedule. A loan accrues interest between payments. Electricity is used all month and invoiced afterwards. An accrued expense records that cost in the period the business used the service, along with a matching liability, so the income statement is not flattered by bills that simply have not arrived yet.

The Canada Revenue Agency describes the same idea for business income. On the accrual method, an allowable expense is deducted in the fiscal period it was incurred, even if the payment happens later, and an expense is generally incurred when you have paid it or are obliged to pay it. On the cash method, expenses are generally deducted when paid, with prepaid expenses treated as an exception.

An illustrative year-end example

Suppose a business has a December 31 year-end and its last payday of the year falls a week or so before the end of December. The wages earned by staff after that payday are unpaid at year-end. If those unpaid wages total $6,000, the books should show a $6,000 wage expense in the current year and a $6,000 accrued liability. The cash leaves the bank in January, but the cost belongs to the year in which the work was done.

The figures are illustrative only. Payroll also involves source deductions and employer contributions, which depend on the facts and are covered separately by your accountant or payroll provider.

Accruals versus accounts payable

Accounts payable usually holds supplier invoices you have already received. Accrued expenses cover costs with no invoice yet, so they are estimated from contracts, usage, pay schedules or last month’s bill. BDC describes the common case as a recurring charge such as a lease payment where the bill for the month has not yet arrived but the amount is known.

Because accruals are estimates, record the basis for each one. When the real invoice arrives, reverse the estimate and book the actual amount so the cost is not counted twice. A bank statement alone will not reveal these items, which is one reason cash-only records understate what a period really cost.

Common mistakes and what to bring to your accountant

The usual problems are forgetting interest between loan payments, missing the last few days of payroll, leaving out professional fees for work already performed, and booking the same cost again when the invoice arrives. Recurring accruals that are never reversed can also quietly inflate liabilities.

Before year-end, gather unpaid payroll dates, loan statements showing the last interest payment, contracts for recurring services, and any invoices dated after year-end that relate to work done before it. Your accountant can then decide which accruals to record and how they affect the tax return.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.