What is an accrued expense?
Published
An accrued expense is a cost consumed during the period that has neither been paid nor invoiced yet. It is recognised as an expense in the income statement and a liability on the balance sheet, so the cost lands in the period it arose rather than the period the invoice showed up.
The equation
Accrued expense = Cost consumed during the period − Amount paid or invoiced for itExample: June electricity
Al-Waha consumed an estimated SAR 3,400 of electricity in June; the utility's invoice arrives mid-July.
Adjusting entry at 30 June:
| Account | Debit | Credit |
|---|---|---|
| Utilities expense | 3,400 | |
| Accrued expenses | 3,400 |
When the actual invoice arrives in July at SAR 3,610:
| Account | Debit | Credit |
|---|---|---|
| Accrued expenses | 3,400 | |
| Utilities expense (estimate variance) | 210 | |
| Accounts payable | 3,610 |
The SAR 210 difference falls in July, which is acceptable as long as the estimate is close. An estimate that misses by 30% every month is not an estimate; it is a guess.
Common accruals
| Item | Why it accrues |
|---|---|
| Month-end salaries | Earned in the month even if paid on the 5th of the next |
| Electricity, water, telecoms | Consumed before they are billed |
| End-of-service benefits | Accrue with every month worked |
| Loan interest | Accrues daily, paid periodically |
| Audit fees | Belong to the year audited, not the year billed |
| Unused employee leave | A standing obligation even if unclaimed |
Accrued expense vs. accounts payable
| Accrued expense | Accounts payable | |
|---|---|---|
| Document? | No, the invoice hasn't arrived | Yes, a recorded supplier invoice |
| Amount | An estimate | Precisely known |
| Origin | Period-end adjusting entry | Recording the bill on receipt |
| Input VAT | Not deductible - no tax invoice exists | Deductible once a valid tax invoice is held |
That last row matters in practice: no input VAT is claimed on an accrual. Deduction depends on holding a valid tax invoice. The accrual entry records the net cost only.
Common mistakes
| Mistake | Effect |
|---|---|
| Not recording accruals at period end | Overstated profit, and a doubled expense in the following period |
| Recording the accrual and never reversing it | The same cost recognised twice |
| Claiming input VAT on an estimate | A deduction with no tax invoice behind it - an exposure at audit |
| Undocumented estimates | Nobody can explain the figure to an auditor later |
Frequently asked questions
Is an accrued expense a liability?
Yes, a current liability, because it is an amount you will actually pay within a short period.
When should accruals be recorded?
At the close of any period for which you produce statements - monthly if you review performance monthly, annually at minimum.
How do I estimate the amount?
From the average of prior periods, from the contract if the amount is fixed, or from an actual meter reading. Document the basis alongside the entry.
What if the estimate exceeds the actual invoice?
The excess reverses in the period the invoice arrives, reducing that period's expense. The treatment is symmetrical.