Definition
An accrued expense is a liability for goods or services received or costs incurred that have not been paid or recorded through the payables process by the balance sheet date. Common examples are unpaid wages and bonuses, payroll taxes, accrued vacation, interest, utilities, audit fees, and unbilled vendor services. Estimates are common when invoices have not arrived.
Why it matters in an audit or review
Accruals carry understatement risk: costs left unbooked flatter income, and a missing invoice is easy to overlook. Auditors test completeness by searching for unrecorded liabilities: reviewing subsequent disbursements, open purchase orders, and vendor statements. For estimated accruals, they evaluate the method and the data, consistent with AU-C 540.
Example
(Illustrative) Employees earned $42,000 of wages for the last three working days of December, paid in January.
Dr Wages expense 42,000 Cr Accrued wages 42,000
The entry reverses or is cleared when the payroll is paid.
Common mistakes
- Accruing only items with an invoice.
- Not reversing the accrual in January, which double counts expense.
- Missing accrued interest on debt.
Sources
- AICPA, AU-C Section 540, Auditing Accounting Estimates and Related Disclosures
- AICPA, AU-C Section 500, Audit Evidence
- FASB ASC 710-10-25, Compensation, General, Compensated Absences
- FASB, Concepts Statement No. 8, Chapter 4, Elements of Financial Statements (definition of a liability)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error