What are Accrued Expenses?
Accrued Expenses is the value of money the company owes that have accrued over time. It represents the amount of expenses the company has incurred but not yet paid. The word accrued just means accumulated. Naturally, you can think of it as expenses the company accumulated over time but not yet paid.
This is a common line item on the Balance Sheet, under the Liability section. It’s considered a Current Liability because the liability is usually settled with cash payments within one year.
Accrued Expenses vs. Accounts Payable
Accrued Expenses is very similar to Accounts Payable. Both represents money not yet paid for expenses the company has already incurred. However, there’s a subtle difference.
Accounts Payable refers to money owed for expenses that are incurred at a specific point in time. For example, let’s assume a company ordered and received $500 of office supplies but hasn’t paid yet. That $500 is Accounts Payable.
By contrast, Accrued Expenses refers to money owed for expenses that accumulate over time. Common examples are wages, rent and utilities. Take wages for example. The company accrues wage expense everyday but they don’t pay wages until every 2 weeks or every month. The wages that accrue over time but not yet paid is included in this line item. Similar concept goes for rent and utilities expense. Companies use electricity every day. The electricity expense accumulate over time and is only paid at the end of the month. Hence, the money owed for the expense is captured as part of Accrued Expenses as opposed to Accounts Payable.
For many companies, Accounts Payable mostly relate to expenses with suppliers and vendors. It’s money owed to other businesses that sell products to the company. On the other hand, Accrued Expenses primarily consist of employee salary and wages, rent, utilities and interest. There are other expenses that accrue over time, but these are the most common items. Companies that have significant accumulated expenses might break it out by category: Accrued Wages, Accrued Rent, and Accrued Interest.