Accrued expenses are costs that have been incurred by a business during a specific accounting period but have not yet been paid. They are recognized in the financial statements for the period in which they occur and not when the cash payment is made. This is a key concept in accrual accounting.
In simple terms, accrued expenses are bills that the company has received but has not yet paid. For example, a business might have used electricity all month but has not yet received or paid the electric bill by the end of the month. In its accounts, the business would still recognize this electricity cost for that month, even though the bill will be paid later.
Accrued expenses are a fundamental concept in financial accounting and are crucial for preparing accurate financial statements. They help businesses and financial analysts understand the true financial obligations and performance of a company in a given period, ensuring that income and expenses are matched in the period they occur.
For instance, A company receives legal services in December but the invoice for these services isn’t issued until January. The cost of these services is recorded as an accrued expense in December’s financial statements. Similarly, employee salaries that are earned in one month but paid in the following month are treated as accrued expenses.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy