Are Accrued Expenses an Expense Account?

Businesses track financial transactions to understand their performance and financial standing. This involves carefully recording when money is spent and when obligations are created. Accurate record-keeping allows a business to assess its profitability and manage its future commitments effectively. Understanding these records provides a clear picture of financial health over time.

Understanding Expense Accounts

An expense account is used to track the costs a business incurs during its operations. These accounts capture the outflow of economic benefits that reduce equity. Common examples include Rent Expense, Utilities Expense, Salaries Expense, and Supplies Expense. Each expense account accumulates specific costs over an accounting period, such as a month or a quarter.

These accounts are temporary, meaning their balances are closed out at the end of each accounting period. Expense accounts appear on the income statement, which reports a company’s financial performance over a period. The total of all expenses is subtracted from revenues to determine the net income or loss for that period.

Understanding Accrued Expenses

An accrued expense represents a cost that a business has incurred but has not yet paid. This means the benefit or service has been received, creating an obligation for future payment. Accrued expenses are classified as liabilities on the balance sheet.

Accrued expenses arise due to the accrual basis of accounting, which recognizes expenses when incurred, regardless of when cash changes hands. This aligns with the matching principle, ensuring that expenses are recorded in the same period as the revenues they helped generate. Common examples include accrued salaries payable for work performed but not yet paid, accrued interest payable on outstanding loans, or accrued utilities for services used but not yet invoiced. For instance, if employees work the last week of December but are paid in January, the salary cost for that December week is an accrued expense.

The Connection: Accrued Expenses and Expense Accounts

While an “accrued expense” refers to an expense that has been incurred but not yet paid, the “Accrued Expenses” account itself is a liability account, not an expense account. This liability account resides on the balance sheet, representing the obligation to pay a past-incurred expense.

When a business recognizes an accrued expense, it performs a specific accounting entry to reflect both the cost incurred and the obligation created. For example, to record accrued salaries at month-end, the Salaries Expense account is debited to increase the expense recognized for the period. Simultaneously, the Accrued Salaries Payable account is credited to increase the recorded obligation. This journal entry ensures that the expense is properly matched to the period in which it was incurred, even though payment has not yet occurred.

This dual impact means that recognizing an accrued expense affects both the income statement and the balance sheet. The expense account directly reduces net income on the income statement. Concurrently, the accrued liability account increases total liabilities on the balance sheet. Therefore, accrued expenses are not expense accounts themselves; rather, they are the liabilities that arise from expenses incurred but unpaid, requiring a corresponding entry to an actual expense account.