Is Accrued Expense a Debit or Credit?

An accrued expense represents a cost that a business has incurred but has not yet paid or received an invoice for. This concept is fundamental to accrual accounting, which requires expenses to be recognized in the period they are incurred, regardless of when the cash transaction occurs. For example, if employees work in December but are paid in January, the December salaries would be an accrued expense. Accrued expenses ensure that a company’s financial statements accurately reflect its obligations and the true costs of operations for a given period.

Understanding Debit and Credit Rules

In accounting, debits and credits are the foundational elements of the double-entry bookkeeping system, ensuring that every financial transaction has an equal and opposite effect on at least two accounts. A debit is an entry made on the left side of an account, while a credit is an entry made on the right side. These entries impact different account types in specific ways.

Debits increase asset accounts and expense accounts, while they decrease liability, equity, and revenue accounts. Conversely, credits increase liability, equity, and revenue accounts, and decrease asset and expense accounts. For instance, when a company receives cash (an asset), the cash account is debited, increasing its balance. If a company pays a bill, the cash account would be credited, decreasing its balance.

Accrued Expenses as Liabilities

Because it represents an amount owed to another party, an accrued expense is classified as a liability on a company’s balance sheet. Specifically, these are often current liabilities, meaning they are expected to be paid within one year.

Therefore, when a business incurs an accrued expense, and that liability increases, the accrued expense account will have a credit entry. This aligns with the fundamental rules of debits and credits, where an increase in a liability account is always recorded as a credit.

Recording Accrued Expenses

When an accrued expense is initially recognized, the accounting entry involves both a debit and a credit to maintain the balance of the accounting equation. The expense account, which is typically found on the income statement, is debited to reflect the increase in the cost incurred.

Simultaneously, the accrued expense account, which is a liability account on the balance sheet, is credited. For example, if a company has incurred $5,000 in utility expenses for February but will not pay the bill until March, the journal entry in February would involve a debit to “Utility Expense” for $5,000 and a credit to “Accrued Utilities Payable” (a liability account) for $5,000. This ensures that the expense is recorded in the correct accounting period, even though the cash has not yet been disbursed.