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Accrued Expenses: How to Record and Reverse Them Correctly
An accrued expense is the mirror image of a prepaid expense — a cost you have incurred but not yet paid. It belongs to the current period because that is when the underlying work or consumption happened. The cash will catch up next month.
An accrued expense is a liability representing a cost the business has already incurred but has not yet been billed for or paid. Common examples include the last week of contractor work in a month, utilities consumed but not yet invoiced, and bonuses earned in the current period but paid the following quarter.
The journal entry pattern is simple: at period-end, debit the expense account and credit accrued expenses (a liability). At the start of the next period, reverse the entry so the eventual invoice or payment posts cleanly without double-counting.
Key takeaways
- ✓ An accrued expense is a liability for costs incurred but not yet billed or paid.
- ✓ The journal entry at period-end debits expense and credits accrued expenses (a liability).
- ✓ A reversing entry at the start of the next period clears the accrual so the eventual invoice can post cleanly.
- ✓ Missing or skipping the reversal is the single most common cause of double-counted expenses across periods.
- ✓ Accrued expenses differ from accounts payable: AP requires an invoice in hand; an accrual exists before any invoice arrives.
- ✓ Reconciling the accrued expense balance to a supporting schedule every period prevents balances from drifting over time.
What an accrued expense is
An accrued expense is a cost that has been incurred but not yet billed or paid. The underlying work has happened, the service has been delivered, or the consumption has occurred — but the invoice has not yet arrived, or it has arrived too late to enter the close, or cash has not yet been disbursed.
Because the cost belongs to the period in which it was incurred, accrual accounting records it in that period even if the invoice and the cash payment follow weeks later. The other side of the entry is a liability — accrued expenses — that holds the obligation until it is settled.
Common examples
Accrued expenses turn up everywhere a business has ongoing operations:
- Contractor work performed at the end of a month. The contractor invoices on the 5th of the following month, but the work belongs to the period it was performed in.
- Utilities consumed but not yet billed. Electric, gas, and water bills typically arrive on a one- to two-month delay.
- Earned-but-unpaid bonuses, commissions, and incentives. When the obligation is created in the current period and paid the following quarter or year.
- Interest accrued on a loan. Daily interest accrues whether or not the lender bills monthly.
- Professional services performed but not yet invoiced. Legal, audit, and consulting fees often arrive months after the work was performed.
- Manufacturing and service costs received but not yet invoiced. Goods received before the vendor's invoice arrives, or services rendered ahead of billing.
The defining characteristic is always the same: the cost has been incurred; the cash and the invoice have not yet caught up.
Journal entries — including the reversal
Three entries handle the full lifecycle of an accrued expense.
Entry 1: The accrual. Posted at period-end, when the cost is incurred but no invoice has arrived.
| Account | Debit | Credit |
|---|---|---|
| Contractor expense | $8,000 | |
| Accrued expenses (liability) | $8,000 |
Entry 2: The reversal. Posted on the first day of the next period.
| Account | Debit | Credit |
|---|---|---|
| Accrued expenses (liability) | $8,000 | |
| Contractor expense | $8,000 |
Entry 3: The actual invoice and payment. When the invoice arrives and is paid.
| Account | Debit | Credit |
|---|---|---|
| Contractor expense | $8,000 | |
| Cash | $8,000 |
The net effect across the two periods: $8,000 of expense in the period the work was performed, $0 of expense in the period the cash was paid, and a liability that briefly held the obligation in between.
Why the reversal matters
The reversal is what makes the system work. Without it, the second entry (the actual invoice payment) lands on top of the original accrual, double-counting the expense and leaving an orphan liability on the balance sheet.
The reversal is the discipline that lets the accountant who pays the invoice in January post it normally, without having to remember which accruals were booked in December. That normalcy is what makes accrual accounting workable at scale. Without reversals, every invoice payment requires a lookup against the prior period's accruals to figure out whether it has already been expensed.
The most common cause of out-of-balance accrual books — across every client we have onboarded — is missed or incorrect reversals. The fix is process discipline: every accrual gets a reversal on day one of the next period, no exceptions.
Accrued expense vs accounts payable
The line between the two is whether an invoice exists. Accounts payable is for invoices in hand that have not yet been paid; accrued expenses are for costs incurred without an invoice yet. Both are current liabilities; both will eventually settle in cash. They differ in their documentation and their lifecycle.
| Dimension | Accrued expenses | Accounts payable |
|---|---|---|
| Invoice exists? | No | Yes |
| Triggered by | Period-end estimation | Invoice receipt |
| Amount | Often estimated | Per invoice |
| Lifecycle | Accrue, reverse, pay | Record, pay |
| Reverses? | Yes — at start of next period | No — settles through payment |
In practice, many accrued expenses convert into accounts payable as soon as the actual invoice arrives. The accrual was the estimate; the AP record is the final figure.
Accrued expense vs prepaid expense
Mirror images. A prepaid expense is cash paid before the benefit is consumed — an asset. An accrued expense is benefit consumed before cash is paid — a liability. Same underlying timing problem, opposite direction.
The accounting for each is also a mirror: prepaid amortization moves value from an asset to expense over time; accrued expense reversal moves a one-time recognized expense into a liability that settles when cash flows.
Reconciling the accrued expense balance
The accrued expense liability balance should be reconciled to a supporting schedule every period. The schedule lists every accrual booked at period-end, with the underlying calculation, the vendor or counterparty, the expected invoice date, and the eventual settlement.
Three things make this reconciliation worth doing:
- It catches missed reversals. If the balance at period-end is higher than the new accruals would explain, an old accrual was never reversed.
- It catches estimation errors. When the actual invoice arrives, the variance from the accrual is recorded. Persistent over- or under-accrual on the same vendor is a process problem.
- It supports the audit. The first thing an auditor will ask about an accrued expense balance is "what's in here and how do you support it?" The schedule is the answer.
Common mistakes
Skipping the reversing entry
The single most common accrual error. Without the reversal, the actual invoice payment double-counts the expense and leaves a stranded liability on the balance sheet.
Booking an accrual then never invoicing or paying it
An accrual that never converts to an actual transaction either represents a genuine obligation that needs settlement, or an estimation error that needs correction. Either way it does not get to sit on the balance sheet indefinitely.
Treating every accrued expense as accounts payable
AP requires an invoice. Accrued expenses are estimates booked before the invoice exists. Confusing them clutters the AP aging report with estimates and obscures real vendor balances.
Estimating the accrual based on the wrong period
A contractor who worked through December 15 should be accrued for the December work, not for the full December–January period. The period of the work is what determines the accrual amount.
No supporting schedule
A journal entry without a supporting schedule cannot be reconciled, audited, or maintained over time. Every period-end accrual should have a documented basis behind it.
Frequently asked questions
What is the difference between accrued expenses and accounts payable?
AP requires an invoice in hand; accrued expenses exist before an invoice arrives. Many accrued expenses convert into AP when the actual invoice is received.
Is accrued expense a debit or a credit?
The accrued expense liability is credited when the accrual is recorded (the expense account is debited). The reversing entry flips both: debit accrued expenses, credit the expense.
When should an accrued expense be reversed?
On the first day of the period following the accrual. Reversing on day one ensures the eventual invoice or payment can post normally without double-counting.
What happens if the actual invoice is different from the accrual?
The difference posts as a current-period adjustment to the relevant expense account. Persistent variances on the same vendor suggest the estimation method needs to be tightened.
Can I just wait for the invoice instead of accruing?
Only if you do not care about period-by-period reporting accuracy. Waiting moves the expense into the wrong period and produces misleading monthly results — which defeats the purpose of accrual accounting.
How long can an accrued expense sit on the balance sheet?
Typically just one period — the accrual is booked at period-end, reversed at the start of the next period, and replaced by either the actual invoice or a fresh accrual estimate. Balances older than 60 days suggest a process problem.
Is unbilled interest an accrued expense?
Yes. Interest accrues daily on outstanding debt whether or not the lender bills monthly. The portion earned through period-end is an accrued expense even before the bank statement arrives.
Where to go next
Read these next:
- The complete accrual accounting pillar
- Prepaid expenses: the mirror image of accrued expenses
- Accrued liabilities: a controller's working guide
- Automating accruals in QuickBooks Online
Related Resources
Sources & References
- FASB revenue recognition guidance — see ASC 606 on fasb.org.
- IRS guidance on accounting periods and methods — see irs.gov.
- IASB revenue recognition standard under IFRS — see ifrs.org.
- AICPA, Audit and Accounting Guide.
- FinOptimal Managed Accounting practice — implementation data across 50+ client environments, 2024–2026.
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