Running a business involves keeping track of a lot more than just how much money is coming in. One of the most important parts of managing your company’s finances is understanding and accounting for what you owe—even if you haven’t received the bill yet. That’s where accrued expenses come in. They might not sound flashy, but they play a huge role in how companies of all sizes keep their books accurate and their strategies grounded in reality.
Whether you’re managing a local coffee shop, a growing SaaS startup, or a large manufacturing firm, accrued expenses are part of your financial world. They impact your income statement, your cash flow projections, and even how investors perceive the health of your business.
So, what are they exactly—and why should you care?
What Are Accrued Expenses?
Accrued expenses are costs that a business has incurred but hasn’t yet paid or received an invoice for. In simple terms, it’s money you owe that hasn’t been formally requested yet. Think of wages your employees have earned by the end of the month but that you haven’t paid out until the next payroll cycle. Or interest on a loan that accumulates daily but is only billed monthly. These are all examples of accrued expenses.
They fall under the accrual basis of accounting, where revenue and expenses are recorded when they are earned or incurred, not when cash changes hands. This provides a more accurate picture of a business’s financial condition, especially over longer periods of time.
Without accounting for accrued expenses, your books could show you having more cash than you really do—or suggest that your profits are higher than they actually are.
The Importance of Accurate Accrual Accounting
Ignoring or mishandling accrued expenses can throw off your entire financial picture. That may not seem like a big deal when you’re just starting out, but as you grow, the stakes get higher. Inaccurate financials can lead to poor budgeting, flawed decision-making, and unhappy surprises when it’s time to close the books or file taxes.
For publicly traded companies, accuracy isn’t just important—it’s legally required. Financial reports must follow generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS), depending on where the company operates. These standards mandate the use of accrual accounting to prevent the kind of manipulation or misrepresentation that led to corporate scandals in the early 2000s.
But even if you’re not a Fortune 500 CEO, understanding how to manage accrued expenses can help you run a smarter, more financially sound business.
Accrued Expenses in Small Businesses
For small businesses, especially those that don’t have a dedicated finance team, accrued expenses can sometimes fall through the cracks. If you’re doing your own bookkeeping or working with a small firm, you might be tempted to use cash accounting because it’s simpler.
But as soon as you start dealing with payroll, loans, rent, or vendors with delayed billing cycles, you’ll need to start thinking in terms of accruals.
Let’s say you run a bakery. You pay rent monthly, but your lease says it’s due on the first of each month. On December 31st, you technically owe January’s rent—but you might not pay it until January 5th. If you’re following accrual accounting, that rent is an accrued expense in December, even if the money hasn’t left your account yet.
Likewise, if your utility company bills you every two months, you’ll still need to accrue one month’s worth of utilities at the end of each month to match the expense with the period it was incurred.
Accrued Payroll and Employee Benefits
Wages are probably one of the most frequently accrued expenses in any business with employees. Let’s say your payroll period runs from the 25th of one month to the 9th of the next, but your reporting period ends on the 31st. You’ll need to accrue the wages earned between the 25th and 31st, even though you won’t actually pay them out until after the 9th.
The same applies to bonuses, commissions, and unused vacation time that employees are entitled to. These obligations build up over time, and proper accrual ensures you’re not underestimating your labor costs or overreporting profit.
Accrued Interest and Loans
If you’ve taken out a loan, chances are the interest accrues daily. But you might only make payments monthly or quarterly. That accumulating interest is an accrued expense. Failing to include it in your books can give you a false sense of liquidity.
For businesses that carry significant debt—think manufacturing, real estate, or capital-heavy tech companies—tracking accrued interest can be a crucial part of maintaining financial integrity. Even missing a few thousand dollars in accrued interest can distort your liabilities and net income figures.
Industry-Specific Examples
Accrued expenses can look very different depending on the industry.
In construction, accrued costs might include materials delivered to a site but not yet invoiced, or subcontractor work completed but not yet billed.
In consulting, accrued time for billable hours that haven’t been invoiced to the client yet is a common issue. Firms often track “work in progress” to stay on top of these figures.
In retail, accrued inventory costs, marketing charges, and software subscriptions all play a part.
For tech startups, you might see accrued legal fees, cloud service costs, and product development work outsourced to external developers—all adding up before a single invoice hits your inbox.
Accrued Expenses for Marketing Spend
Marketing is a common source of accrued expenses, especially in businesses that run multiple campaigns or work with external agencies. If you commit to a $10,000 campaign in September but the final invoice doesn’t land until October, that expense still belongs in September’s books—because that’s when the marketing service was delivered.
This applies whether you’re working with a digital ad agency, a freelance graphic designer, or a billboard vendor. It also includes things like influencer partnerships, promotional video shoots, or email campaign platforms that charge monthly but provide services throughout a billing cycle.
Failing to accrue these costs can make it look like you had a highly profitable month—only for the expense to drag down your numbers the following month, skewing your data and potentially leading to bad planning decisions.
Good marketing teams often work closely with finance to forecast and accrue spend accurately. This ensures that performance metrics align with the actual costs incurred to achieve them.
Audits and Investor Relations
Properly accounting for accrued expenses isn’t just a matter of internal accuracy. It’s also something auditors look for. If your business is ever audited—whether by the IRS or an external firm—you’ll need to justify how and why certain expenses were accrued.
Investors, too, look at accrued liabilities to assess the health and stability of a business. A company that doesn’t account for what it truly owes can appear more profitable or cash-rich than it actually is. That might get attention in the short term, but it could lead to broken trust when reality catches up.
You can read more about how accrual accounting affects financial statements at Investopedia’s guide, which offers a detailed breakdown of what counts as an accrued expense and why it matters.
Final Thoughts: Get It Right, Early On
Accrued expenses may not seem exciting, but they’re essential for any business that wants to grow responsibly. They ensure your financial records reflect the real state of your business—not just what’s been paid or received.
Whether you’re bootstrapping a startup, managing a midsize company, or scaling into something larger, understanding how and when to accrue expenses is a skill worth building. It will help you make smarter decisions, plan better budgets, and speak the language of investors and auditors with confidence.
Most importantly, it will keep your business grounded in reality—and that’s the best foundation for long-term success.
