What is Accrued Expense?

An Accrued Expense is an expense that a business has incurred during a period but has not yet paid for or received an invoice for. To comply with the accrual accounting principle, these expenses must be recorded in the period they occur, not when they are paid. They are recorded as a current liability on the balance sheet.

For Startups: Accruing for expenses is crucial for an accurate picture of profitability. A common accrued expense for startups is employee salaries. If the accounting period ends on December 31st, but salaries for December are paid on January 5th, the salary expense must be "accrued" and recorded in the December financial statements.

Example: A company receives electricity for the month of March, but the bill doesn't arrive until April. The company must estimate the March electricity cost and record it as an accrued expense in its March financial statements.