Expense Accrual: How to Accrue Expenses at Month End

An expense accrual records a cost your business has already incurred but has not yet been invoiced for. The work was done, the goods arrived, the service was consumed, and no invoice has shown up. Under accrual accounting you still have to book the expense in the period it belongs to, so you estimate it, debit the expense, and credit a liability. When the invoice finally lands, you reverse the accrual and post the real invoice against it.

This is one of the two or three things that make month-end close take longer than anyone wants. Not because the entry is hard, but because finding what to accrue means knowing what happened in a period before the paperwork proves it happened.

What is an expense accrual?

An expense accrual is a journal entry that recognizes an expense in the period it was incurred rather than the period it was paid or invoiced. The matching principle says the cost belongs in the same period as the benefit it produced. If your consultant worked all of March and invoices you on April 10, that cost is a March expense. Waiting for the invoice would push it into April and make both months wrong.

The offsetting credit is a liability, usually called Accrued Expenses or Accrued Liabilities. It sits on the balance sheet as a debt you owe, distinct from accounts payable because no invoice exists yet to define the amount.

The journal entries

Say your law firm did $8,000 of work in March and will invoice in April.

March 31, the accrual:

April 1, the reversal: Most teams book accruals as reversing entries, which back themselves out automatically on the first day of the next period.

April 10, the invoice arrives for $8,450 and is processed normally:

The net effect on April's legal fees expense is $450, the amount by which your March estimate was low. That $450 is the cost of the estimate being imperfect, and it is why the reversing approach is standard. Nobody has to remember to match the invoice against a stale accrual; the reversal handles it and the variance falls out on its own.

Accrued expenses vs accounts payable

These two get confused constantly, and the distinction is genuinely simple.

Both are liabilities and both mean you owe money. The difference is whether a supplier has told you the number yet. This is covered in more depth in accrued expenses vs accounts payable.

What should you accrue at month end?

Go looking for the places where a cost was incurred and the invoice has not caught up.

• Goods received but not invoiced. The single biggest one for most companies. Inventory or materials hit the dock, the receipt was entered, no invoice. See goods received not invoiced, which is a big enough category to have its own account.
• Services performed but not billed. Consultants, lawyers, agencies, contractors. Ask the department, not the vendor.
• Wages and payroll. The days worked after the last pay period ends but before the period closes.
• Utilities. Almost always billed in arrears, so almost always accrued.
• Interest. Accrued on debt for the days elapsed, regardless of when the payment is due.
• Bonuses and commissions. Earned in the period, paid later.
• Rebates and volume incentives you owe. Easy to forget, and they compound.

How do you know what to accrue if no invoice exists?

This is the real question, and the answer is that you triangulate from things other than the invoice. Open purchase orders with goods receipted against them give you a quantity and a PO price, which is your best estimate. Contracts and statements of work give you a rate and a schedule. Prior-period actuals give you a run rate for recurring costs like utilities. And departments know what they asked for, even if they have not seen a bill.

The practical process is to run an open-receipts report from your ERP, pull anything received in the period with no matching invoice, value it at PO price, and accrue that. Then walk the recurring list, utilities, rent, interest, payroll, and accrue those on the run rate. Then ask each department head one question: did anyone do work for you this month that we have not been billed for. That third step catches the services accruals that no report will ever show you.

Why accruals are an accounts payable problem, not just an accounting one

Accounting owns the entry, but AP owns the reason you need it. The size of your accrual is a direct measure of how many invoices are late, stuck, or lost. A company whose invoices are captured within a day of arrival, matched automatically, and posted before the cutoff has a small, boring accrual. A company whose invoices sit in a shared mailbox for two weeks has a large accrual built from guesses.

The failure that costs real money is subtler. When an invoice arrives late, gets posted to the wrong month, and the accrual was never reversed, you have double-counted the expense. Do that a few times and your margin looks wrong and nobody can explain why. Faster, cleaner invoice intake shrinks the estimate and shrinks the room for that error, which is a large part of what invoice processing software is actually buying you at close.

The other quiet source of missed accruals is invoices that arrived and were never seen. If a vendor emailed a bill to someone who was on vacation, that cost is neither in AP nor in the accrual. Teams that route every supplier email through a single controlled inbox, and extract the invoice data from the message automatically, close that gap without asking anybody to be more organized.

Do accruals get reversed?

Almost always, yes. Reversing accruals is the standard practice because it prevents double-counting. The accrual reverses on the first day of the new period, and when the real invoice posts, it lands in a clean expense account with nothing to net against manually. If you do not reverse, someone has to remember to post the invoice against the accrual liability instead of the expense, and eventually somebody forgets.

The exception is a long-lived accrual for something that genuinely spans periods, such as an accrued bonus pool that will be paid at year end. Those stay on the balance sheet and are drawn down when paid.

Accrual vs prepaid: the mirror image

An accrual is an expense you incurred before you paid. A prepaid is an expense you paid before you incurred it. Accruals create a liability, prepaids create an asset. Both exist because cash and economic activity happen at different times, and accrual accounting cares about the activity. If you are chasing the other side of this, see prepaid expenses for the amortization schedules and entries.

How to make accruals less painful

Shorten the gap between the event and the invoice. Everything else is downstream of that.

1. Get invoices into the system the day they arrive, from every channel, into one queue.
2. Match them against open POs and receipts automatically, so the open-receipts report is accurate rather than a list of things nobody entered.
3. Set a firm invoice cutoff for the period and communicate it to vendors who chronically bill late.
4. Automate the standing accruals, the utilities and interest and payroll, so the manual work is only the judgment calls.
5. Track the reversal, so no accrual outlives its invoice.

A close that runs three days shorter is worth real money in finance headcount and in decisions made on numbers that are not yet stale. Most of the days are hiding in step one. See month-end close in accounts payable for the full checklist, and accounts payable software for what a faster intake process actually looks like.