Accrued Expenses: What They Are and When You Deduct Them
An accrued expense is a cost your business has already used up but has not paid for yet: December's electricity, a subcontractor's finished work, a month of loan interest. On the accrual method you record it now, in the period you incurred it, as a liability, and settle the cash later. Whether you need to track accrued expenses at all, and whether the IRS lets you deduct one in the year you book it, both depend on which accounting method you file under. Here is what an accrued expense is, how to record it, and when it becomes deductible.
What is an accrued expense?
An accrued expense is a cost you have incurred but not yet paid. The work was done or the resource was consumed inside one accounting period, but the bill lands, or the payment clears, in the next one. Accrual accounting matches the cost to the period that benefited from it, so you book the expense now and record a matching liability for the money you still owe.
Take Nora, a freelance developer who reports on the accrual method. On December 31, 2026 she closes her books and three costs from December are still unpaid:
- Electricity for December: the utility bills in arrears, so her $180 December charge does not arrive until January 6, 2027.
- A subcontractor: a designer finished $2,000 of work in December and will invoice in January.
- Loan interest: $75 of interest built up on her business loan across December, due with the January 15 payment.
None of that cash has left her account, but all three costs belong to 2026. So Nora records an adjusting entry dated December 31: she debits the three expense accounts and credits a single liability account, Accrued Expenses, for $180 + $2,000 + $75 = $2,255. Her December profit now reflects every cost December incurred, and her balance sheet shows the $2,255 she still owes.
Accrued expenses vs accounts payable
Both are liabilities for costs you have incurred but not paid, and beginners collapse them into one bucket. The dividing line is the invoice. An accrued expense is one you record yourself, before any bill arrives, often at an estimated amount. Accounts payable starts when a supplier hands you an actual invoice for a specific figure.
| Accrued expense | Accounts payable | |
|---|---|---|
| Invoice in hand? | No, not yet | Yes, a specific bill |
| How you get the amount | You calculate or estimate it | Read it off the invoice |
| Typical examples | Wages earned but unpaid, interest, taxes, utilities used | A vendor bill for supplies or inventory received |
| Who records it first | You, at period-end | The supplier, by billing you |
| Reversed next period? | Usually reversed, then re-booked from the invoice | No, it stays until you pay it |
Nora's December electricity is an accrued expense on December 31 because no bill exists yet. When the $180 invoice arrives on January 6, that same obligation becomes an ordinary account payable she pays from.
How the accrual reverses
An accrued expense is a placeholder for a bill you have not processed, so most businesses reverse it at the start of the next period and then record the real transaction normally. This keeps you from counting the same cost twice.
Follow Nora's $180 electricity charge across the boundary:
- December 31, 2026: she books the accrual. Utilities Expense goes up $180; Accrued Expenses (a liability) goes up $180. December's profit absorbs the cost.
- January 1, 2027: she reverses it. Accrued Expenses drops $180; Utilities Expense drops $180. Her books are back to zero on this item, with no stray liability lingering.
- January 6, 2027: the real invoice arrives and she records it the usual way when she pays it, without having to remember that December already carried part of it.
The reversing entry is bookkeeping hygiene, not a second decision. It exists so the January payment can be entered by anyone, from the invoice alone, without double-counting December.
Do you even need to track accrued expenses?
For many sole proprietors, the honest answer is no. Accrued expenses only exist on the accrual method. Under the cash method, you record an expense when you pay it, so December's electricity is a January deduction, and there is nothing to accrue.
The IRS notes that "most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records," and under it "you generally deduct expenses in the tax year in which you actually pay them" (Publication 334). Most one-person businesses are well below the gross-receipts threshold that forces larger entities onto accrual (average annual gross receipts of $31 million or less for 2025, indexed for inflation each year), so they choose cash and book no accruals.
If you file on the accrual method, the calculus flips. You "report income in the year earned and deduct or capitalize expenses in the year incurred" (Publication 334), which is exactly what an accrued expense captures. Either way, the IRS expects a "consistent accounting method," so this is a standing choice, not something you toggle to smooth a single year's profit.
When the IRS lets you deduct an accrued expense
Booking an accrual on your own ledger is not the same as earning the deduction. Under an accrual method, IRS Publication 538 lets you deduct a business expense only when two conditions are both met: the all-events test and economic performance.
The all-events test is met, in the words of the statute, when "all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy" (26 U.S.C. §461(h)(4); Publication 538). In plain terms: you owe the money, and you know how much.
Economic performance is the timing gate people miss. You "cannot deduct or capitalize a business expense until economic performance occurs," and for services or property provided to you, that happens "as the property or services are provided" (Publication 538). Section 461(h)(1) says the all-events test is not met "any earlier than when economic performance with respect to such item occurs."
Nora's three December accruals all clear both tests for 2026: the electricity was consumed in December, the subcontractor's services were performed in December, and interest accrues with the passage of time. Each is a valid 2026 deduction.
One narrow relief valve exists. The recurring-item exception in section 461(h)(3) lets you treat economic performance as met for an item that recurs year to year, if performance happens within the shorter of a reasonable period or 8.5 months after year-end and either the amount is immaterial or accruing it now matches income better. It is an exception to the timing rule, not a way around the all-events test.
Common misconceptions
"If I book the accrual, I can deduct it." Not on its own. A cash-method filer gets no deduction until payment, and an accrual-method filer gets none until economic performance occurs. Suppose Nora accrues $1,000 in December for a repair a contractor will not perform until March 2027. Her books may show the liability, but the IRS does not allow the 2026 deduction, because the service, the economic performance, happens in 2027. Book timing and tax timing can legitimately diverge, and the return follows the tax rule.
"Accrued expenses and accounts payable are the same account." They overlap in meaning, both are unpaid liabilities, but they enter your books at different moments and from different triggers. Keeping them in separate accounts is what lets you reverse the estimate and then record the real invoice cleanly.
"Accruals are only for big companies." The cost, not the company size, is what creates an accrual. A one-person business on the accrual method books them exactly like a large firm does. The reason most sole proprietors do not encounter one is the method they file under, not their scale.
How SparkReceipt fits
An accrual is an adjusting entry your accounting software or accountant records; that is double-entry bookkeeping, not something SparkReceipt does for you. What SparkReceipt handles is the pre-accounting layer underneath it: capturing and categorizing the documents that back every cost. Connect your inbox and the January utility bill for December's power is captured and dated the moment it arrives, so the invoice that settles your accrual is already logged, not buried in email.
From there, categorized expenses and income push straight into QuickBooks Online or Xero, where the accrual entries live, and clean exports give your accountant the source records for every adjusting entry. You keep the receipts organized; the books stay accurate. See pricing to get started.
Frequently asked questions
Are accrued expenses assets or liabilities? Liabilities. An accrued expense records money you owe for a cost you have already incurred, so it sits in the liability section of the balance sheet, usually as a current liability you expect to pay within a year.
Is an accrued expense the same as an accrued liability? The terms are used interchangeably. "Accrued expense" names the cost hitting your income statement; "accrued liability" names the matching obligation on your balance sheet. One adjusting entry creates both sides.
Do cash-basis taxpayers record accrued expenses? No. On the cash method you record an expense only when you pay it, so there is nothing to accrue. Accrued expenses are a feature of the accrual method, which most sole proprietors do not use.
What is the difference between accrued and prepaid expenses? They are mirror images. An accrued expense is a cost you have used but not paid. A prepaid expense is a cost you have paid but not used yet, so it starts as an asset and becomes an expense over time.
Can I deduct an accrued expense before I pay it? Only on the accrual method, and only once both the all-events test and economic performance are met for that item (Publication 538). Cash-method filers deduct expenses when paid, not when accrued.
Key takeaways
- An accrued expense is a cost you have incurred but not yet paid, recorded now as a liability so the expense lands in the period that benefited from it.
- It differs from accounts payable by the invoice: you record an accrual yourself, often at an estimate, before any bill arrives.
- Most accruals are reversed at the start of the next period, so the real invoice can be entered normally without double-counting.
- Accrued expenses exist only on the accrual method. Cash-method filers, which the IRS says is most sole proprietors, deduct when they pay and book no accruals.
- Booking an accrual does not earn the deduction. Under accrual, the IRS requires both the all-events test and economic performance before an expense is deductible.