Definition:
An accrued expense is an expense that has been incurred but not yet paid. It’s a liability that will be settled in the future.
Examples of accrued expenses:
- Interest on a loan: The interest that has accumulated on a loan but hasn’t been paid yet.
- Salaries and wages: The salaries and wages earned by employees but not yet paid due to payroll cycles.
- Utilities: Utility bills that have been incurred but not yet received or paid.
- Taxes: Taxes that have been calculated but not yet paid.
Why are accrued expenses important?
- Accurate financial statements: Accrued expenses are important for preparing accurate financial statements, as they represent liabilities that need to be recognized.
- Cash flow management: Understanding accrued expenses can help businesses manage their cash flow by anticipating future payments.
- Decision-making: Accrued expenses can affect a company’s profitability and financial health, so it’s important to consider them when making financial decisions.
In essence, accrued expenses are a type of liability that represents debts owed by a company for expenses incurred but not yet paid.
