A complete, step-by-step guide to accounting for accrued expenses — including adjusting entries for salaries, rent, interest, and utilities — with fully worked journal entries, reversal entries, and balance sheet treatment under the accrual basis of accounting.
What Are Accrued Expenses? The Core Accounting Concept
Accrued expenses are costs that a business has incurred during an accounting period but has not yet paid or received an invoice for by the period end. Under the accrual basis of accounting — mandated by GAAP and Ind AS — expenses must be recognised in the period they occur, not when cash is paid. This is governed by the Matching Principle: expenses are matched to the revenue they help generate in the same period.
Balance Sheet Position — Current Liability (Credit Balance)
4
Common Types — Salaries, Rent, Interest, Utilities
Ind AS
Governed By — Ind AS 37 / AS 29 · Accrual Basis
📌 Definition: An accrued expense (also called outstanding expense) is an expense that has been incurred (used or consumed) but has not yet been paid or recorded via an invoice. The liability is recognised at the period-end through an adjusting journal entry, and settled in the subsequent period when cash is paid.
✅ The Matching Principle: Revenue is recognised when earned; expenses are matched to the period in which they help generate revenue. If December salaries are due in January, they are still December expenses and must be accrued on 31st December. This ensures the Income Statement reflects true profitability for the period.
02 — Types
Common Types of Accrued Expenses
Virtually any recurring expense can be accrued at period-end if not yet paid. The four most common categories in practice are employee-related costs, occupancy costs, financing costs, and operating service costs.
01
PERSONNEL
Accrued Salaries & Wages
Payroll earned by employees but not paid by period end. Most common in companies where pay date falls after month-end.
02
OCCUPANCY
Accrued Rent
Rent for business premises used during the period but invoice not received or payment not made by the closing date.
03
FINANCING
Accrued Interest
Interest on loans, overdrafts, or bonds that has accumulated (elapsed time × rate) but the due date falls in the next period.
04
SERVICES
Accrued Utilities & Services
Electricity, water, gas, internet, or professional fees consumed during the period — invoice arrives in the following period.
🔑 Key Difference — Accrued vs Prepaid:Accrued expenses are expenses already incurred but not yet paid → creates a liability (Cr Accrued Expenses A/c). Prepaid expenses are expenses paid in advance before the benefit is received → creates an asset (Dr Prepaid Expenses A/c). Both are adjusting entries under the accrual system.
03 — Accounting Process
The 3-Stage Accrual Accounting Process
Recording accrued expenses follows a consistent three-stage lifecycle: the period-end adjusting entry creates the liability; the subsequent payment settles it; and an optional reversal entry at the start of the new period simplifies bookkeeping.
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STAGE 01
Period-End Adjusting Entry
On the last day of the accounting period, Dr Expense A/c and Cr Accrued Expenses/Outstanding Expenses A/c. This recognises the cost and creates the liability.
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STAGE 02
Balance Sheet Presentation
Accrued Expenses A/c (Cr balance) appears on the Liabilities side under Current Liabilities. Expense A/c (Dr balance) flows to the Income Statement / P&L A/c.
→
STAGE 03
Payment Entry (Next Period)
When payment is made, Dr Accrued Expenses A/c and Cr Bank/Cash A/c. This clears the liability. The expense has already been recognised in the previous period.
STAGE 04
Optional Reversal Entry
On the first day of the new period, some companies reverse the accrual (Dr Accrued Expenses | Cr Expense A/c) to avoid double-counting when the actual invoice arrives.
04 — Case Study: Accrued Salaries
Case Study 1: Accrued Salaries & Wages
Accrued salaries are the most frequently encountered accrual in practice. When month-end falls on a day other than payday, the unpaid salary for that month must be accrued so the expense is captured in the correct period.
FACTS OF THE CASE
XYZ Pvt. Ltd. — Accrued Salaries at Month-End
XYZ Pvt. Ltd. employs staff with a total monthly salary of ₹5,00,000. The company's accounting period ends on 31st March. Salaries for March are payable on 5th April. The company must accrue the March salaries in its March books as the expense has been incurred even though cash will be paid in April.
Entry 1: Adjusting Entry — Accruing March Salaries on 31st MarchPeriod-End Adjusting Entry
Account
Dr/Cr
Debit (₹)
Credit (₹)
Salaries & Wages A/c
Dr
5,00,000
—
To Accrued Salaries A/c (Outstanding Salaries A/c)
Cr
—
5,00,000
Total
5,00,000
5,00,000
Being March salaries accrued but not yet paid as of 31st March. Salaries A/c is debited to recognise the expense in the March P&L. Accrued Salaries A/c (a current liability) is credited.
Being March salaries paid on 5th April. Accrued Salaries A/c (the liability) is debited to extinguish it. Bank A/c is credited as cash goes out. The expense is NOT recognised again in April — it was already recognised in March.
05 — Case Study: Accrued Rent
Case Study 2: Accrued Rent Expense
When a business occupies premises and the rent invoice arrives or is payable after the accounting period ends, rent must be accrued at period-end to correctly reflect the occupancy cost for that period.
FACTS OF THE CASE
ABC Traders — Office Rent Accrual at Year-End
ABC Traders occupies office space at a monthly rent of ₹80,000. The landlord sends invoices on the 10th of the following month. For the year ending 31st December, the December rent invoice will only arrive on 10th January. ABC must accrue December rent so it appears in the December P&L.
Entry 1: Adjusting Entry — Accruing December Rent on 31st DecemberYear-End Adjusting Entry
Account
Dr/Cr
Debit (₹)
Credit (₹)
Rent Expense A/c
Dr
80,000
—
To Accrued Rent A/c (Outstanding Rent A/c)
Cr
—
80,000
Total
80,000
80,000
Being December rent accrued as of 31st December. The premises were used throughout December, so the rental cost belongs to this period. Rent Expense A/c is debited (increases expenses for the year). Accrued Rent A/c is credited (creates a current liability on the Balance Sheet).
Entry 2: Payment Entry — Rent Paid in JanuarySubsequent Payment in Next Period
Account
Dr/Cr
Debit (₹)
Credit (₹)
Accrued Rent A/c
Dr
80,000
—
To Bank A/c
Cr
—
80,000
Total
80,000
80,000
Being December rent paid in January on receipt of invoice. The liability (Accrued Rent A/c) is discharged. No rent expense is recognised in January for this payment.
06 — Case Study: Accrued Interest
Case Study 3: Accrued Interest on a Loan
Interest on loans accrues daily based on the outstanding principal and the interest rate. When the interest payment date falls in the next accounting period, the interest accrued up to the period-end date must be recognised as an accrued expense.
FACTS OF THE CASE
PQR Ltd. — Accrued Interest on Bank Loan
PQR Ltd. has a bank loan of ₹10,00,000 at an annual interest rate of 12% p.a.. Interest is payable quarterly. The company's year ends on 31st March. For the last quarter (January–March), interest of ₹30,000 has accrued and is due on 31st March.
📐 Calculation: Annual Interest = ₹10,00,000 × 12% = ₹1,20,000 per year. Quarterly Interest = ₹1,20,000 ÷ 4 = ₹30,000 per quarter. This amount accrues over the January–March quarter and must be recorded at 31st March.
Entry 1: Adjusting Entry — Accruing Interest for Jan–Mar Quarter31st March — Year-End Adjusting Entry
Account
Dr/Cr
Debit (₹)
Credit (₹)
Interest Expense A/c
Dr
30,000
—
To Accrued Interest A/c (Interest Payable A/c)
Cr
—
30,000
Total
30,000
30,000
Being interest accrued for the Jan–Mar quarter on a ₹10,00,000 loan @ 12% p.a. = ₹30,000. Interest Expense A/c is debited to P&L. Accrued Interest A/c (a current liability) is credited. This reduces the net profit for the year by ₹30,000.
Entry 2: Payment Entry — Interest Paid to BankOn Payment Date
Account
Dr/Cr
Debit (₹)
Credit (₹)
Accrued Interest A/c
Dr
30,000
—
To Bank A/c
Cr
—
30,000
Total
30,000
30,000
Being quarterly interest paid to the bank. The interest payable liability is extinguished. No interest expense hits the P&L in April for this payment — the cost was correctly captured in March.
07 — Case Study: Accrued Utilities
Case Study 4: Accrued Utility Expenses
Utility bills (electricity, water, gas) are typically billed one month in arrears. The energy consumed in December is billed in January. Under accrual accounting, the December consumption must be estimated and accrued at 31st December.
FACTS OF THE CASE
LMN Manufacturing — Electricity Bill Accrual
LMN Manufacturing receives electricity bills on the 15th of each month for the previous month's consumption. For December, the estimated electricity bill is ₹45,000 (based on meter readings). The bill will arrive on 15th January. LMN must accrue this at 31st December to reflect December's true operating costs.
To Accrued Utilities A/c (Outstanding Electricity A/c)
Cr
—
45,000
Total
45,000
45,000
Being estimated electricity consumption for December accrued as of 31st December. Under Ind AS, the best estimate is used and adjusted on receipt of the actual invoice. If the actual bill differs from the estimate, the difference is adjusted in January.
Entry 2: Payment on Receipt of Actual Invoice in JanuaryInvoice Receipt and Payment — Next Period
Account
Dr/Cr
Debit (₹)
Credit (₹)
Accrued Utilities A/c (₹45,000 accrued)
Dr
45,000
—
To Bank A/c (Actual bill paid)
Cr
—
45,000
Total
45,000
45,000
Being December electricity bill paid in January. If the actual bill was ₹47,000 (not ₹45,000), the ₹2,000 difference is recorded as an additional January expense: Dr Electricity Expense A/c ₹2,000 | Cr Bank A/c ₹2,000.
08 — Reversal Entries
Reversal Entries — Simplifying Bookkeeping in the New Period
Reversal entries are optional journal entries made on the first day of the new accounting period. They reverse the prior period's adjusting entry to prevent double-counting when the actual payment is processed normally through accounts payable in the new period.
🔄 When to Use Reversal Entries: Reversals are useful when the accounts payable team processes normal supplier invoices without checking for existing accruals. By reversing the accrual on Day 1 of the new period, the standard payment entry in the new period nets to zero — avoiding double-counting the expense.
Reversal Entry — On 1st April (Reversing 31st March Salary Accrual)First Day of New Period — Optional Entry
Account
Dr/Cr
Debit (₹)
Credit (₹)
Accrued Salaries A/c
Dr
5,00,000
—
To Salaries & Wages A/c
Cr
—
5,00,000
Total
5,00,000
5,00,000
Reversal entry on 1st April — exactly opposite of the 31st March accrual. When salaries are paid on 5th April: Dr Salaries A/c ₹5,00,000 | Cr Bank A/c ₹5,00,000 — the two entries net to zero in April, with no double-counting.
09 — Quick Reference Summary
Master Quick-Reference Table — All Accrued Expense Journal Entries
Type of Accrual
Debit Account
Credit Account
B/S Position
P&L Impact?
Accrued Salaries / Wages
Salaries & Wages Expense A/c
Accrued Salaries A/c
Current Liability
Yes — Increases Expense
Accrued Rent
Rent Expense A/c
Accrued Rent A/c
Current Liability
Yes — Increases Expense
Accrued Interest
Interest Expense A/c
Interest Payable A/c
Current Liability
Yes — Increases Expense
Accrued Utilities / Electricity
Utilities / Electricity Expense A/c
Accrued Utilities A/c
Current Liability
Yes — Increases Expense
Accrued Professional Fees
Professional Fees Expense A/c
Accrued Professional Fees A/c
Current Liability
Yes — Increases Expense
Payment of Accrued Expense
Accrued Expense A/c (specific)
Bank / Cash A/c
Liability Cleared
No — Liability settled
Reversal Entry (Optional)
Accrued Expense A/c
Expense A/c
No Net Effect
No — Reversal only
10 — Interactive Classroom
Accounts School — Accrued Expenses Interactive Classroom
Step into the virtual accounting classroom. Navigate through 6 animated lessons covering the definition, matching principle, real-world examples, and reversal entries — with a live quiz, teacher narration, and interactive notes.
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Accounts School
ACCRUED EXPENSES · ADJUSTING ENTRIES · ZEROLEV
Step into a virtual classroom! Learn accrued expenses, adjusting entries, the matching principle, and reversal entries with an animated teacher, interactive blackboard, live quizzes, and voice narration.
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Accounts School
ACCRUED EXPENSES · ADJUSTING ENTRIES
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11 — FAQ
Frequently Asked Questions
What is the journal entry for accrued expenses?
The standard journal entry for accrued expenses is: Dr Expense A/c (the specific expense, e.g., Salaries A/c, Rent A/c, Interest Expense A/c) and Cr Accrued Expenses A/c (also called Outstanding Expenses A/c or the specific liability name). When the actual payment is made in the next period: Dr Accrued Expenses A/c | Cr Bank/Cash A/c. The key principle: recognise the expense first, then settle the liability when payment is made.
Is accrued expense a debit or credit?
When you create an accrued expense via an adjusting entry, the expense account is debited (Dr) and the accrued expense liability account is credited (Cr). On the Balance Sheet, accrued expenses appear as a current liability with a credit balance. When you pay the accrued expense, the accrued liability account is debited (Dr — reducing it to zero) and Bank is credited (Cr — cash goes out).
What is the difference between accrued expenses and accounts payable?
Accounts Payable is a liability for expenses where an invoice has already been received but not yet paid — the obligation is formally documented. Accrued Expenses are liabilities for expenses that have been incurred but where no invoice has yet been received — the amount is often estimated. Both are current liabilities on the Balance Sheet.
How are accrued expenses shown in the balance sheet?
Accrued expenses are shown on the Liabilities side of the Balance Sheet under Current Liabilities. They may be disclosed as "Accrued Expenses," "Outstanding Expenses," "Other Current Liabilities," or under specific line items (e.g., Accrued Salaries, Interest Payable). Under Schedule III (Companies Act 2013 / Ind AS), accrued expenses fall under "Other Current Liabilities."
What is the difference between accrued expenses and prepaid expenses?
Accrued Expenses: Expense already incurred (benefit received), payment not yet made → Current Liability on Balance Sheet. Entry: Dr Expense A/c | Cr Accrued Expense A/c. Prepaid Expenses: Payment already made, but benefit not yet received → Current Asset on Balance Sheet. Entry: Dr Prepaid Expense A/c | Cr Cash/Bank A/c. Memory aid: Accrued = "I owe" (liability); Prepaid = "They owe me the service" (asset).
What happens if accrued expenses are not recorded?
Failing to record accrued expenses leads to: (1) Understated expenses — the P&L shows higher profit than actually earned (violation of Matching Principle); (2) Understated liabilities — the Balance Sheet shows lower current liabilities than actually owed; (3) Overstated net worth — equity is overstated because retained earnings/profit are inflated. Under Ind AS / GAAP, omitting accruals can constitute a material misstatement.
Are reversal entries mandatory for accrued expenses?
No — reversal entries are optional. They are a bookkeeping convenience used by companies whose accounts payable team routinely processes supplier invoices as new expense entries in the next period. Many modern accounting software systems (Tally, SAP, QuickBooks) offer automatic reversals. If you do NOT reverse, then when the actual invoice arrives, you debit the liability account (not the expense account) to settle it.
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