The financial accounting term accrued expense refers to costs incurred during an accounting period, but not yet paid for in cash by a company in that same accounting period.
Accrued expenses is an accounting method that is aligned with the matching principle, which states that revenues generated in an accounting period need to be matched with the expenses incurred in the same accounting period.
Companies accrue expenses when they have received goods or services, but have not yet paid the vendor or trade partner before the end of the accounting period. This is often a timing issue; the vendor has provided a service but not yet sent an invoice to the company for payment.
Companies will frequently accrue the salaries of their employees or the interest due on a loan. A pending liability is created, and the company is obligated to eventually make payment on this money in a future accounting period; performing an accrual aligns costs with the appropriate timeframe. Subject matter experts are often asked to provide accrual estimates each month.
Company A hires a vendor to install a new software product over the next 12 months. The vendor’s cost is $1,200,000 and the agreement calls for four quarterly payments of 25% of the contract value. Since the vendor would be completing roughly 1/12th of the project each month, Company A would accrue an expense at a rate of $100,000 per month, even though payment is rendered to the vendor quarterly.