Accrued expenses represent costs a company has incurred but hasn’t yet paid, making them essential for accurate financial reporting in accrual accounting. These unpaid expenses include items like wages, utilities, interest on loans, and taxes—costs that build up over time and are settled later.
Recorded as liabilities on the balance sheet, accrued expenses are the company’s obligations to pay for services or goods already received. They differ from accounts payable, which generally involve documented invoices for products or services received.
Accrued expenses ensure that a company’s financial statements capture all incurred costs within the period they happen, even if payment hasn’t been made yet. This matching principle offers a true snapshot of financial health by aligning expenses with the revenue they help generate. For example, accrued expenses allow a business to recognize month-end salaries payable in the next month, avoiding an understatement of expenses.
Accurately recording accrued expenses also improves cash flow planning and GAAP compliance, which is invaluable for companies prioritizing informed financial decisions and transparent reporting for investors and regulators.
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