An accrued expenses journal entry debits an expense account and credits a liability account — usually a specific payable such as Utilities Payable, Wages Payable, or Interest Payable. You record it as an adjusting entry when the business has incurred a cost during the period but has not yet paid it, often because the bill has not even arrived. When the cash goes out in the next period, a second entry debits the payable and credits Cash, so the expense is never counted twice.
The usual suspects are costs that build up quietly between billing dates: wages employees have earned but not yet been paid, interest growing on a loan, utilities used before the meter is billed, and taxes owed but not yet due. Cash-basis books ignore all of these until money moves. Accrual accounting does not — the expense belongs to the period that incurred it, whether or not a payment happened.
Here is the situation that creates the entry. Cedar Lane Printing closes its books on December 31. The shop ran its presses all through December, so it used December electricity — but the utility company will not send the bill until early January. Waiting for the invoice would push the cost into January and understate December's expenses, so Cedar Lane accrues it. The utility's online portal shows December usage of $1,870.
| Account | Debit | Credit |
|---|---|---|
| Utilities Expense | $1,870 | |
| Utilities Payable | $1,870 |
The debit to Utilities Expense puts the cost in the period that consumed it. The matching principle says an expense belongs in the same period as the revenue it helped generate — Cedar Lane's December print jobs were run on December electricity, so the expense belongs in December, invoice or no invoice.
The credit to Utilities Payable records the obligation. As of December 31, Cedar Lane owes the utility company $1,870, and an amount you owe is a liability. Trace it through the accounting equation: assets do not move because no cash has been paid, liabilities rise by $1,870, and equity falls by $1,870 because the expense reduces net income. The equation stays balanced.
Some textbooks and companies credit a single account called Accrued Expenses or Accrued Liabilities instead of a named payable. The mechanics are identical; the account title just tells the reader which obligation it is. Either way, the credit lands in a current liability — not in Accounts Payable, which is generally reserved for amounts a supplier has formally invoiced.
On January 12, the bill arrives for exactly $1,870 and Cedar Lane pays it. The expense already hit December's income statement, so the January entry must not touch an expense account. Its only job is to clear the liability and release the cash.
| Account | Debit | Credit |
|---|---|---|
| Utilities Payable | $1,870 | |
| Cash | $1,870 |
After both entries, the story is complete: December's income statement shows the $1,870 expense, January's shows nothing, and the payable exists only in the gap between them. That two-entry pattern — accrue, then pay — is the whole life cycle of an accrued expense, and it is one of the four adjusting-entry types walked through in our adjusting entries guide.
The classic exam mistake is recording the expense when the cash leaves instead. Debiting Utilities Expense in January double-counts nothing on its own — but combined with the December accrual it puts the same $1,870 on two income statements, overstating total expenses. If your trial balance shows an expense in the payment period and a leftover payable from the accrual, that is the error to hunt for. The test question to ask of any entry: has this cost already been recognized? If yes, the payment entry touches only the payable and Cash.
Suppose cash is tight and Cedar Lane pays only $1,120 of the bill in January. The January entry debits Utilities Payable $1,120 and credits Cash $1,120, leaving a $750 balance sitting in the payable ($1,870 − $1,120 = $750). A February entry debits Utilities Payable $750 and credits Cash $750 to clear it. Notice what never changes: the full $1,870 expense stays in December no matter how the payments are split.
Many companies flip the accrual on the first day of the new period. On January 1, a reversing entry debits Utilities Payable $1,870 and credits Utilities Expense $1,870. That looks odd — it briefly puts a negative $1,870 in January's expense account — but it lets the bookkeeper record the January payment the routine way: debit Utilities Expense $1,870, credit Cash $1,870. The negative and positive amounts cancel, so January's net utilities expense is still zero. Reversing entries are optional. They exist purely for convenience, so every incoming bill can be coded as an expense without checking whether part of it was accrued last period.
Interest accruals need a calculation, because no invoice ever arrives — you compute the amount from the loan terms. Say Cedar Lane signed a $48,000 note payable on November 1 at 6.5% annual interest, with all interest due at maturity. By December 31, two months of interest have accrued:
Interest = Principal × Rate × Time = $48,000 × 6.5% × 2/12 = $520
The December 31 adjusting entry debits Interest Expense $520 and credits Interest Payable $520. The time fraction is the step students miss: the 6.5% is an annual rate, so two months of borrowing earns the lender only 2/12 of a year's interest.
Accrue in the period that incurred the cost — debit the expense, credit a payable. Pay in the next period — debit the payable, credit Cash. The expense hits the income statement exactly once, in the period it was incurred, never the period it was paid.
The journal entry has both: a debit to the expense account and a credit to the payable. The accrued liability account itself carries a credit balance, because it is a liability — so when a question asks about the balance-sheet account, the answer is credit.
Almost always. Accrued wages, utilities, interest, and taxes are typically settled within weeks or months, so they sit in the current liabilities section of the balance sheet. Only an accrued amount not due within a year would be classified as long-term, which is rare.
No — it is a liability, an amount the business owes. The asset that students confuse it with is a prepaid expense, which is cash paid before the cost is incurred. Accrued means incurred but not yet paid; prepaid means paid but not yet incurred.
Both are amounts owed. Accounts payable covers costs a supplier has formally invoiced, so the amount is exact. Accrued expenses cover costs incurred but not yet billed, so the amount is sometimes an estimate. Once the invoice arrives, some companies reclassify the balance from accrued expenses into accounts payable.
The difference runs through the expense in the period the bill arrives. If Cedar Lane accrued $1,870 but the bill came to $1,940, the payment entry debits Utilities Payable $1,870, debits Utilities Expense $70 for the shortfall, and credits Cash $1,940. Small estimate differences are normal and are not corrected retroactively.
The expense side does, in the period the cost was incurred. The unpaid balance appears on the balance sheet as a liability and stays there until it is paid. One accrual therefore touches both statements at once.
By the FinanceBrain Team · Last verified July 10, 2026 · How we produce and verify articles