What are accrued expenses?

Accrued expenses refer to costs that have been incurred during a specific accounting period but have not yet been paid by the end of that period. This concept is essential in the accrual basis of accounting, which recognizes expenses when they are incurred, regardless of when the cash payment occurs. By acknowledging accrued expenses, companies ensure that their financial statements reflect all obligations during the period in which they arise, thus providing a more accurate picture of their financial position.

For example, if a company receives services in December but does not pay for them until January, the expense is recognized in December as an accrued expense. This matching of expenses to the period when they are incurred is crucial for accurately assessing a company’s profitability and financial health.