An accrual, or accrued expense, is a means of recording an expense that was incurred in one accounting period but not paid until a future accounting period. Accruals differ from Accounts Payable transactions in that an invoice is usually not yet received and entered into the system before the year end.
Accrual example
A typical example is credit sales. The revenue is recognized through an accrued revenue account and a receivable account. When the cash is received at a later time, an adjusting journal entry is made to record the cash receipt for the receivable account.
An accrued expense—also called accrued liability—is an expense recognized as incurred but not yet paid. In most cases, an accrued expense is a debit to an expense account. This increases your expenses.
Accrual accounting uses the double-entry accounting method. Accrual accounting is required for companies with average revenues of $25 million or more over three years.
In bookkeeping, accrued expenses are considered to be current liabilities because they are usually due within a year of the transaction. In the accounts payable accrual process, accrued expenses are charges you are obligated to pay in the future for goods and/or services already rendered.
When recording an accrual, the debit of the journal entry is posted to an expense account, and the credit is posted to an accrued expense liability account, which appears on the balance sheet.
Accrual-method taxpayers may deduct compensation in the current tax year if the liability is fixed and determinable at year-end and the taxpayer pays the compensation within 2½ months after year-end.
Accrued Expenses Recognition Rules
Under accounting by the accrual basis, the costs are matched either against revenues or against the relevant time period in order to determine the net income. All those costs which are not charged against the income of the period are carried forward.
There are generally six types of journal entries namely, opening entries, transfer entries, closing entries, compound entries, adjusting entries, reversing entries, and each represent a specific purpose for which such entries are made.
There are two main types of accruals in accounting:
Accruals are amounts of money that you know will come or go from the business. Accruals are amounts of money that you know will come or go from the business. Accruals are recorded on the balance sheet as an asset (if it's owed to you) or a liability (if you owe it to someone else).
The first step to choosing an accounting career path is to learn more about four main accounting types – corporate, public, government and forensic accounting.
If your business is registered for VAT, then you always account for accruals net of VAT.
In simple terms, with accrual accounting you realize or recognize expenses when you incur them, not when you pay them. You realize revenue when you generate it, not when the customer pays.
The three rules are: Debit what comes in, Credit what goes out (Real Account). Debit the receiver, Credit the giver (Personal Account). Debit all expenses and losses, Credit all incomes and gains (Nominal Account).
Example Gratitude Journal Entry
The warm cup of coffee I had this morning that helped me start my day off right. The beautiful sunrise I saw on my way to work that reminded me of the beauty in nature. The supportive friends and family in my life who are always there for me when I need them.
Sensitive information. Some important information, like phone numbers, may be necessary in your journal. But avoid writing information like credit card details, passport numbers, etc. This could be disastrous if your journal is stolen or lost and someone else gets their hands on it.
For some small businesses that are not required to use accrual accounting for compliance purposes, sticking to the cash accounting method will simply make more sense. Sometimes, this includes companies that operate with simple cash transactions and have no inventory to account for.
You record an accrued expense journal entry by debiting the expense account and crediting a liability account. This entry reflects the cost your business has incurred but not yet paid or invoiced. These expenses are recorded in three steps: the initial recognition, the reversal, and the payment.
Under the IRS 12-month rule, a taxpayer can deduct a prepaid expense in the current year if the rights or benefits for the taxpayer do not extend beyond the earlier of: 12 months after the right or benefit begins OR. The end of the tax year after the tax year in which payment is made.
Basically, the de minimis safe harbor allows businesses to deduct in one year the cost of certain long-term property items. IRS regulations set a maximum dollar amount—$2,500, in most cases—that may be expensed as "de minimis," which is Latin for "minor" or "inconsequential." (IRS Reg. §1.263(a)-1(f) (2025).)
State-Specific Deductions
For example, California allows renters to claim a deduction for rent paid on their primary residence, while other states may not.
Accrual accounting ensures revenue is recognized monthly over the service period, not all at once when payment is received. It also allows for the recognition of deferred revenue as a liability, which is gradually recognized as earned income over the contract period.