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Accrued Expenses

Moneyzine Editor
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Moneyzine Editor
1 mins
January 3rd, 2024
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Accrued Expenses

Definition

The financial accounting term accrued expense refers to costs incurred during an accounting period, but not yet paid for in cash by a company in that same accounting period.

Explanation

Accrued expenses is an accounting method that is aligned with the matching principle, which states that revenues generated in an accounting period need to be matched with the expenses incurred in the same accounting period.

Companies accrue expenses when they have received goods or services, but have not yet paid the vendor or trade partner before the end of the accounting period. This is often a timing issue; the vendor has provided a service but not yet sent an invoice to the company for payment.

Companies will frequently accrue the salaries of their employees or the interest due on a loan. A pending liability is created, and the company is obligated to eventually make payment on this money in a future accounting period; performing an accrual aligns costs with the appropriate timeframe. Subject matter experts are often asked to provide accrual estimates each month.

Example

Company A hires a vendor to install a new software product over the next 12 months. The vendor's cost is $1,200,000 and the agreement calls for four quarterly payments of 25% of the contract value. Since the vendor would be completing roughly 1/12th of the project each month, Company A would accrue an expense at a rate of $100,000 per month, even though payment is rendered to the vendor quarterly.

Related Terms

Matching Principle
The matching principle is a financial accounting term that refers to a standard, which states that revenues generated in an accounting period need to be matched with the expenses incurred in that same accounting period.
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Income Statement
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
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Balance Sheet
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
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Accrued Revenue
The financial accounting term accrued revenue refers to income earned during an accounting period, but not yet recorded or received prior to the company's financial closing date.
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Invoice
A document that itemizes the transfer of goods or services between a buyer and seller is known as an invoice. Information appearing on an invoice includes the names of the buyer and seller, price paid, quantities, and date of the transaction.
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