The accrued expenses adjusting entry, with worked examples
An accrued expense is a cost the business has already incurred but hasn't paid by the end of the period. This page shows the adjusting entry that puts it in the right month, with three worked examples: an unpaid utility bill, wages earned since the last payday, and interest building up on a loan.
What is an accrued expense?
Some costs build up before anyone pays them. Employees work Monday to Thursday and are paid on Friday. A loan charges interest every day, but the interest is paid only when the loan is repaid. The electricity used in March is billed in March and paid in April.
In each case, the expense belongs to the period in which it happened, not the period in which the cash leaves. That is the core idea of accrual accounting: record expenses when they are incurred, so they sit next to the revenue they helped produce. Until the bill is paid, the business owes the money, so it also has a liability.
An accrued expense adjusting entry therefore does two things at once:
- It increases an expense, so this period's income statement shows the full cost of running the business.
- It increases a payable, so the balance sheet shows what the business owes.
The pattern is always the same: debit the expense, credit a payable. The only things that change are which expense, which payable, and how you work out the amount. Cash is not part of the entry, because nothing has been paid.
Accrued expenses are one of the four main kinds of adjusting entries. For the full picture, including prepaid expenses and depreciation, see adjusting entries practice.
Worked example 1: an unpaid bill
Here is the transaction from the lesson's free exercise:
Harbor Bakery received a $525.08 utility bill for this month. It will pay the bill next month.
Which expense? The bill is for utilities used this month, so Utilities Expense increases. Expenses increase with a debit.
Which payable? Harbor Bakery owes the utility company. A bill owed to a supplier goes to Accounts Payable. Liabilities increase with a credit.
How much? The bill gives the amount directly: $525.08.
| Account | Debit | Credit |
|---|---|---|
| Utilities Expense | 525.08 | |
| Accounts Payable | 525.08 |
Next month, when Harbor Bakery pays, it debits Accounts Payable $525.08 and credits Cash $525.08. That second entry clears the liability. It does not touch Utilities Expense again, because the expense was already recorded in the month the utilities were used.
Worked example 2: accrued wages
Wages are the most common accrued expense, because paydays rarely line up with the last day of the month. A premium exercise in this lesson gives this situation:
Pine Street Dental's employees earn $820.00 per working day in total and are paid every Friday. The month ends on a Thursday, so 4 working days of wages (Monday to month end) are unpaid. Record the adjusting entry.
Step 1: Count the unpaid days
The last payday was the previous Friday. Since then, staff have worked Monday, Tuesday, Wednesday and Thursday. The month ends on Thursday, so those 4 days belong to this month but won't be paid until Friday, which falls in next month.
Step 2: Multiply by the daily wages
Accrued wages = $820.00 × 4 = $3,280.00.
Step 3: Record the adjusting entry
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | 3,280.00 | |
| Wages Payable | 3,280.00 |
Step 4: What happens on payday
On Friday, Pine Street Dental pays a full week: 5 × $820.00 = $4,100.00. Of that, $3,280.00 was already recorded as an expense last month and is sitting in Wages Payable. Only Friday's $820.00 is a new expense. So the payday entry debits Wages Payable $3,280.00 and Wages Expense $820.00, and credits Cash $4,100.00. Each day's wages end up in the month that day was worked.
The exercise treats wages as one total to keep the focus on timing. Real payroll also involves withholdings and employer payroll costs, which are covered on the payroll journal entries page using example rates for practice.
Worked example 3: accrued interest
Interest is another cost that builds up quietly. Another premium exercise in this lesson gives this situation:
Harbor Bakery has a $8,000.00 note payable at 12% annual interest. Interest is paid when the note is repaid. Record the interest that has built up over the 1 month since the note was signed.
Step 1: Use the interest formula
Interest = principal × annual rate × months / 12. The rate is annual, so you must scale it to the time that has passed.
$8,000.00 × 12% × 1 / 12 = $80.00.
Step 2: Record the adjusting entry
| Account | Debit | Credit |
|---|---|---|
| Interest Expense | 80.00 | |
| Interest Payable | 80.00 |
Notes Payable stays at $8,000.00. The amount borrowed hasn't changed. What has changed is that Harbor Bakery now owes $80.00 of interest on top of it, and that goes to its own account, Interest Payable.
If the note had been outstanding for 3 months with no interest paid, the same formula would give $8,000.00 × 12% × 3 / 12 = $240.00. The months in the formula are the months since interest was last recorded, not the length of the loan.
What the accruals do to the statements
Harbor Bakery appears in two of the examples, so put its two accruals together to see the effect at month end.
| Accrual | Expense increased | Payable increased | Amount |
|---|---|---|---|
| Utility bill | Utilities Expense | Accounts Payable | 525.08 |
| Interest on the note | Interest Expense | Interest Payable | 80.00 |
| Total | 605.08 |
Without these two adjusting entries, Harbor Bakery's expenses for the month would be $605.08 too low, so its profit would be $605.08 too high. Its liabilities would also be $605.08 too low, because the balance sheet would leave out money it clearly owes. Both errors point the same way: the business would look healthier than it is.
That is why accrued expenses matter to anyone relying on the numbers. An owner deciding whether the month was profitable, or a lender checking how much the business owes, needs every cost that belongs to the month, paid or not. The adjusted totals then flow into the adjusted trial balance, and from there into the financial statements.
Common mistakes
The exercises in this lesson check each line of your entry, and these are the mistakes they recognize.
- Crediting Cash. This is the mistake to watch for in every accrual. For Harbor Bakery's utility bill and Pine Street Dental's wages, nothing has been paid yet, so Cash hasn't changed. Credit Accounts Payable or Wages Payable. Cash is credited later, on the day the bill or the wages are actually paid.
- Putting every line on the wrong side. Debiting Accounts Payable and crediting Utilities Expense would mean the business owes less and spent less, the opposite of what happened. The expense increases (debit) and the amount owed increases (credit).
- Accruing a full year of interest. Using the annual rate without scaling gives $8,000.00 × 12% = $960.00, twelve times too much for one month. Multiply by the months that have passed and divide by 12.
- Crediting Notes Payable instead of Interest Payable. Adding the $80.00 to Notes Payable mixes interest owed with the principal borrowed. Keep them apart: the note's principal doesn't change, and accrued interest goes to Interest Payable.
How to spot an accrued expense
At each month end, look for costs that have been used but not yet recorded. Useful questions:
- Did anyone work for us since the last payday? If so, accrue wages for the unpaid days.
- Do we have a loan or note? If interest isn't paid monthly, accrue interest for the months since it was last paid or since the note was signed.
- Have we received a bill we haven't recorded? Utilities, repairs and professional services are common. Accrue them to Accounts Payable.
Accrued expenses are the mirror image of prepaid expenses. With a prepaid expense, cash goes out first and the expense comes later. With an accrued expense, the expense comes first and the cash goes out later. On the revenue side, the same pair exists: unearned revenue is cash first, and accrued revenue is work first.
The free exercise below gives you new numbers each time.
Frequently asked questions
What is the journal entry for accrued expenses?
Debit the expense account (such as Wages Expense, Interest Expense or Utilities Expense) and credit a payable (Wages Payable, Interest Payable or Accounts Payable) for the amount incurred but not yet paid.
Is an accrued expense a liability?
The accrued amount creates a liability, the payable, because the business owes it. The expense itself appears on the income statement for the period in which it was incurred.
Why not just record the expense when it's paid?
Because then the cost would land in the wrong month. Wages worked in March but paid in April would make March look more profitable and April less, even though nothing about the business changed.
How do I calculate accrued interest for part of a year?
Multiply the principal by the annual rate and by the months that have passed, then divide by 12. For $8,000.00 at 12% for 1 month, that is $80.00.
Do I record the accrual again when I pay?
No. The payment entry debits the payable and credits Cash, which clears what you owe. The expense was recorded once, by the adjusting entry, in the month it was incurred. Debiting the expense again on payday would count it twice. The only new expense on payday is any cost from the new period, like Friday's wages in the Pine Street Dental example.
What is the difference between an accrued expense and accounts payable?
Accounts Payable is one of the accounts an accrual can use, usually for a supplier's bill. Accrued wages and interest go to their own payable accounts, Wages Payable and Interest Payable, so each kind of debt is tracked separately.