An accrued expense is an expense which is recorded in the accounting books even though it has not yet been paid. The expense is recorded because there is a reasonable expectation that the funds will be paid out, and the company wants to account for it. Accrued expenses may also be referred to as accrued liabilities, and they are documented in the financial accounts of companies of all sizes. They are also disclosed in public financial filings.
To be considered an accrued expense, an expense must be periodic with a high probability of collection. Interest is a classic example, and things like payroll and taxes could also be considered accrued expenses. In these cases, the funds haven't yet been paid out, but they will be, and accounting for them can be an important part of budgeting properly. Companies can also have accrued income, funds which they have a reasonable expectation of collecting from outside sources.
If, for example, a company takes out a loan due in six months with a lump interest payment, the interest needs to be counted as an accrued expense over those six months. It hasn't been paid yet or even billed, but it exists as an expense which will need to be covered in the future. Likewise, companies list payroll as an accrued expense because they will be expected to pay it at the end of the pay period, even if they haven't paid it out just yet.
Failure to account for an accrued expense can cause problems with accounting. A budget may be overestimated because people don't think about accrued liabilities which will impact the amount of available funds, as when companies neglect to think about tax payments and subsequently find themselves short when such payments are due. Not accounting for accrued expenses can also create a false picture of financial health, by not disclosing future financial obligations which will become an issue for the company in the future.
Accrued expense accounting can get complicated. Accountants have to be careful when deciding how to classify accounting entries to make sure that they are accurate. It's also important to know how to read statements to understand what is being disclosed when one reviews public financial statements. People who are new to reading financial statements may want to ask a financial adviser for help so that they can learn about what the different entries on public statements mean.
