WHAT IS Accrued Expenses?
Accrued expenses are costs a business has incurred but has not yet paid.
They are recorded in the accounting records when the expense occurs, even if the actual payment is made later. Accrued expenses are also known as accrued liabilities because they represent amounts a business owes to another party.
For example, a company may use electricity throughout September but receive and pay the electricity bill in October. The company has already used the service in September, so the expense should be recorded in September. The unpaid amount is an accrued expense until the company pays the bill.
There are two main methods of accounting: cash basis and accrual basis. In cash basis accounting, revenue and expenses are recorded only when cash is actually received or paid. This simpler method is often used by very small businesses or sole proprietors because it’s easy to track cash flow (if money enters the bank, it’s income; if money leaves, it’s an expense). However, it can be misleading for a growing business because it might not account for money owed or outstanding bills. In accrual basis accounting, revenue is recorded when it’s earned (even if not yet paid), and expenses are recorded when they’re incurred. For example, if your U.S. company delivered a service in June but gets paid in July, under accrual accounting, the revenue is recorded in June. This method provides a more accurate picture of financial performance over time, as it matches related revenues and expenses in the same period. This gives a clearer picture of a business’s financial health and is generally required for larger companies or those with inventory. Clemta’s dashboard allows you to manage your business finances using either method, depending on your business size and goals.