Accrued Expenses: Where Strong Accounting Meets Better Decision-Making

Understanding accrued expenses is essential for reading financial statements beyond just “what hit the bank.”
As a CPA and CFO, I often see businesses that are profitable on paper but surprised by cash obligations they didn’t fully anticipate. Accrued expenses represent costs that have been incurred but not yet invoiced or paid—things like payroll earned but unpaid, utilities already consumed, interest that has accumulated, or taxes owed for the period. Under accrual accounting, these costs must be recorded when the economic activity occurs, not when cash leaves the account, which is why they appear as current liabilities on the balance sheet.

This timing difference is critical because accrued expenses directly affect EBITDA, working capital, and short-term liquidity analysis. Unlike accounts payable, which are backed by an invoice and a fixed amount, accruals rely on estimates that require judgment, consistency, and periodic true-ups. When done well, accrual accounting provides a clearer picture of operating performance and prevents understating liabilities. When done poorly, it can distort margins, misstate cash needs, and create unpleasant surprises at month-end or quarter-end.

Strong accrual processes—supported by clear policies and regular reconciliations—help leadership make informed decisions with confidence. If you want financials that truly reflect how your business is operating, understanding and managing accrued expenses isn’t optional—it’s foundational.