What are Accrued Expenses?
Whether you’re a small business owner or professional accountant, you’re probably familiar with the term “expenses.” This catch-all term is used to describe any payment made towards a product or service that’s related to your business. But there are several different types expenses, one of which is accrued. Today, we’re going to take a closer look at accrued expenses, breaking down the term while revealing how it’s used in the modern-day business world.
Basically, an accrued expense is any expense that has occurred but has not been recorded yet by the business in its general ledger. This is stark contrast to prepaid expenses, which as the name suggests are paid before they are recorded in the general ledger.
Here’s an example of an accrued expense: if you take a small business loan from a local bank, the interest for that load is generally classified as an accrued expense. Other examples of accrued expenses include goods received for which no distributor has been invoiced; taxed incurred; and wages incurred, assuming the payment has not been recorded into the general ledger.
The defining characteristic of all accrued expenses is that it’s an expense that has occurred has not been recorded yet. So, why would a business or company incur an expense without first recording it? There are several circumstances in which accrued expenses happen, most of which involve expenses that aren’t fixed. As mentioned above, interest on loans is among the most common types of accrued expenses. If the interest rates is adjustable, perhaps the business owner doesn’t know how much it will be; therefore, he or she waits until the lender has invoiced their business to include it in their general ledger.
As with all expenses, it’s important for small business owners and accountants to keep track of accrued expenses. Such expenses can be somewhat confusing because they are incurred before they are added to the general ledger. But if you make a note of your accrued expenses, you can add them to your general ledger to maintain an accurate and correct balance.
Hopefully, this will give you a better understanding of accrued expenses and how they are used in modern-day business.
Have anything else that you would like to add? Let us know below!