FAQs about reporting accrued expenses

October 27, 2025

Accrued expenses are liabilities that may appear on the balance sheets of companies that follow U.S. Generally Accepted Accounting Principles (GAAP). Many non-experts in accounting are unclear about which accrued expenses must be recognized and/or disclosed in a company’s financial statements under the accounting rules. These Q&As make accrued expenses easier to understand.

What are accrued expenses?

Accrual-basis accounting requires expenses to be recognized when incurred, regardless of when the payment is made. At the end of the accounting period, your company may have incurred expenses in the current period that have yet to be paid or recorded in its financial statements. Unrecorded expenses incurred in the current period require adjusting entries.

For instance, if your company has borrowed money to finance operations or capital assets, it’s accumulating interest expense daily. An adjusting entry may be needed at the end of the accounting period to record the interest incurred during that period. It appears on the balance sheet as “accrued interest” (a current liability) and on the income statement as “interest expense.”

Other common examples of expenses that may be owed but unpaid at the end of the period include:

By accruing expenses, a company matches revenue earned in the accounting period with the related expenses incurred in that period. Reporting many accrued expenses, such as accrued interest, is straightforward. However, reporting for certain accrued expenses may be more complicated because estimates are required.

What footnote disclosures are required for accrued expenses?

In addition to reporting amounts for accrued expenses on the balance sheet and income statement, companies must disclose in the financial statement footnotes the nature and types of accrued expenses with material balances. If accrued expenses rely on estimates, companies must disclose the assumptions and methods used to develop those estimates, especially if they significantly impact financial statements. Material changes to accrued expenses must also be disclosed. For example, a company might provide the following disclosures for accrued wages and benefits:

As of December 31, 2023, the company has accrued $1.2 million for wages and related benefits, representing employee compensation earned but unpaid as of the balance sheet date. These amounts include salaries, bonuses and payroll taxes. These amounts will be paid in the first quarter of the following fiscal year. Management regularly reviews and adjusts the accruals based on actual compensation and obligations.

Are there differences in reporting accrued expenses for accounting and tax purposes?

Some companies apply different rules for recognizing income and expenses for tax purposes. Specifically, certain small businesses can choose to use cash-basis accounting for federal income tax purposes. For the 2024 tax year, the threshold for this purpose is $30 million in average annual gross receipts over the previous three tax years. The threshold is updated periodically for inflation.

Under the cash method, income is reported when it’s received, and expenses are deducted when paid, rather than when they’re incurred (as under the accrual method). Using cash-basis accounting for tax purposes can be advantageous because it defers the recognition of taxable income.

In addition, special tax rules apply to certain entities that report accrued bonuses. Accrual-basis taxpayers can deduct accrued bonuses in the year employees earn them, but only if two conditions are met:

1. Bonus amounts are fixed obligations by the end of the tax year, and

2. Bonuses are paid within 2½ months after the end of the tax year

   (generally March 15 for calendar-year businesses).

   
   

If the company delays bonus payment beyond this period, the deduction is taken in the year the bonus is paid.

The favorable tax treatment for deducting accrued bonuses is limited to bonuses paid to unrelated parties. For a corporation, a related party is an individual who owns more than 50% of the company. For S corporations, partnerships and limited liability companies, related parties include their shareholders, partners or members.

What are the challenges in accounting for accrued expenses?

Reporting accrued expenses can be challenging and requires meticulous recordkeeping, especially when a company follows different rules for recognizing expenses for book and tax purposes. Errors and omissions may happen when making estimates or matching expenses in the proper accounting period, resulting in under- or overstated liabilities. Some companies may also misclassify accrued expenses, causing confusion in financial reporting.

In addition, dishonest employees may use accrued expenses to hide fraud or misstate financial results. For instance, fake accruals for nonexistent expenses may be used to create a reserve that can be reversed to inflate future profits. Or management might hide bills or manipulate estimates to avoid recognizing accrued expenses in the current period, leading to artificially inflated profits. External audits can help detect these schemes. (See “How auditors assess accrued expense accounts” below.)

Get it right

The accounting rules for reporting accrued expenses help ensure your company’s expenses are fully recognized in the proper period. This allows lenders, investors and other financial statement users to get a true picture of your company’s financial performance. It also facilitates comparisons of your company’s results over time and against competitors who follow GAAP. Contact your CPA if you have additional questions about reporting accrued expenses.

How auditors assess accrued expense accounts

External auditors play a critical role in ensuring that accrued expenses are reported completely and accurately. For instance, they may perform cut-off testing, send third-party confirmations, review transactions recorded after the financial statement date, and examine supporting documents (such as invoices, contracts and payroll records) to verify all relevant expenses are reported in the proper period. They also compare accrued expenses with prior periods and industry averages to identify unusual trends or discrepancies.

Adjusting journal entries may require close inspection to detect improper alterations used to misstate financial results. And, when management makes estimates for accrued expenses, auditors may test the reasonableness of the assumptions underlying management’s estimates, perform their own independent estimates and/or recommend specialists for complex estimates, such as accrued compensation, warranties and pension liabilities.