What it means
An accrued expense is a cost you've already incurred but haven't been billed for. The work happened or the service was used; the invoice just hasn't arrived. At month end you record your best estimate so the month carries its own costs.
It's like jotting down a bar tab before the check comes. You know roughly what you owe, and the bill confirms the exact number later.
At month end, list what you received and weren't billed for: legal or accounting work, usage-based software, payroll for days worked but paid next month. Each estimate is booked as an expense and as a liability, usually called accrued expenses or accrued liabilities.
When the real bill arrives, it's recorded against the accrual so the cost isn't counted twice. Many teams make the accrual auto-reversing. It undoes itself on the first day of the next month, the bill is entered as normal, and any gap between the estimate and the bill lands in the month the bill arrives.
Acme's outside counsel worked on a customer contract in March. The bill won't come until mid-April, but the firm estimates $7,500. At the March close Acme debits legal fees and credits accrued expenses for $7,500. In April the bill arrives at $7,800. The accrual absorbs the first $7,500 and the extra $300 is an April expense.
Accrued expenses sit beside accounts payable on the balance sheet; payables have been billed and accruals haven't yet. Getting them right is most of what cutoff means on the cost side, and they're among the first things a CPA review looks at.
Why it matters. Skip them and expenses land a month late, so one month looks cheap and the next looks expensive. Investors comparing months see a swing that isn't real.
The entry, worked
Acme's outside counsel worked on a customer contract in March. The bill won't arrive until mid-April, and the firm estimates it at $7,500.
| Account | Debit | Credit |
|---|---|---|
| Legal fees | $7,500.00 | |
| Accrued expenses | $7,500.00 | |
| Total | $7,500.00 | $7,500.00 |
March carries the legal cost, and the April bill is booked against the accrual instead of as a second expense.
Common questions
How do I accrue a bill I don't know the exact amount of?
Use the best estimate you have, like a quote, the vendor's estimate or last month's usage. When the bill arrives, any difference is booked in that month.
What's an auto-reversing accrual?
An accrual set to reverse on the first day of the next month. The real bill can then be entered normally without double-counting.
Do I need to accrue payroll?
Yes, when a pay period straddles month end: the days already worked, plus the employer payroll taxes on them. Vacation employees have earned and can carry forward or be paid out is usually accrued too, under ASC 710.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- AccrualAn expense incurred, or revenue earned, before it is invoiced — recorded at period end so it lands in the right periodGlossary
- Why startups should close their books every monthA monthly close turns a bank balance into numbers an investor, an auditor or a 409A firm will accept. What it is, and why it gets expensive to skip.Guide · 4 min
- Form 1120: what to give your tax preparer, and whenWhat a startup hands its tax preparer for Form 1120: closed books, a balance sheet that ties to Schedule L, book-to-tax items, ownership and 1099s.Guide · 5 min
- How to read an income statement (P&L)Revenue, cost of revenue, gross margin, operating expenses and net income, read line by line, on accrual basis, with the mistakes founders make most.Guide · 7 min
- Balance sheet explained for startupsAssets equal liabilities plus equity. What each startup line means, from deferred revenue to the SAFE and the accumulated deficit, and why it must balance.Guide · 7 min
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.Guide · 5 min
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.Guide · 6 min
- Cash vs accrual accounting for startups, and the IRS ruleCash or accrual for a startup: why investors and auditors read accrual, when the IRS lets a C-corp file on cash, and the 2026 gross receipts limit.Guide · 5 min
- Accrued expenses vs accounts payable: the differenceAP is a bill you’ve received; an accrued expense is a cost incurred before the bill arrives. When to accrue, and how reversing entries work, by example.Guide · 5 min
- Adjusting entriesThree entries nobody sends an invoice for, made on the last day of the month, that turn a record of transactions into a set of accounts.Lesson 9
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.