Accrued Expenses

Accrued expenses are liabilities for goods or services already received but not yet invoiced or paid as of the reporting date. Recording them is a direct application of the matching principle: cost belongs in the period in which the underlying benefit was consumed, regardless of when the invoice arrives or the payment clears.

Common accruals include compensation earned but unpaid, including salaries through the period end, vacation and paid time off where the obligation vests, and bonus and commission amounts expected to be paid; professional fees for audit, legal, tax, and consulting work performed but not billed; interest accrued on borrowings since the last payment date; utilities, rent, and other operating costs invoiced in arrears; and estimated liabilities for warranties, rebates, and self-insured claims.

The completeness assertion is the hard part. Unlike accounts payable, which is populated by received invoices, accruals depend on someone knowing that a cost was incurred. The standard procedures are a search for unrecorded liabilities — examining invoices and cash disbursements in the period after year end to identify items belonging to the prior period — and reviewing open purchase orders, contracts, and legal invoices for work in progress. Estimation accruals such as bonuses and rebates additionally require assessing whether the estimate is reasonable, which typically means comparing prior period accruals to actual settlement amounts.

Accrual accounts are also a recognized earnings management vehicle, because building an excess accrual in a strong period and releasing it in a weak one smooths results without any transaction occurring. Auditors therefore examine accrual rollforwards for releases lacking a substantive basis, and evaluate whether the pattern of over- or under-accrual across periods suggests bias in management's estimates.