What are accrued expenses?

Accrued expenses refer to expenses that have been incurred during a particular accounting period but have not yet been paid by the end of that period. This concept is rooted in the accrual basis of accounting, where expenses are recorded when they are incurred, regardless of when the cash payment is made.

For example, a company may have received services or goods (like electricity or rent) in one month but hasn't paid for those services until the following month. In this situation, the company will recognize the expense in the current month’s financial statements, thus reflecting the true cost of operations accurately. Recording accrued expenses ensures that financial statements provide a clear picture of the company’s financial position, adhering to the matching principle, which states that expenses should be matched with the revenues they help to generate within the same period.

In contrast, expenses paid in advance are known as prepaid expenses, which represent payments made before the related expense is incurred. Completely settled expenses indicate that payments have already been made. Lastly, future obligations for services not yet received refer to liabilities that are not recognized as current expenses until the services are actually rendered or incurred.