Incurred vs. Accrued in Accounting – Main Differences and Examples

In accounting, incurred refers to when the business owes money as a result of a transaction, while accrued refers to the practice of recording financial transactions as they happen – regardless of any cash exchange. While incurred and accrued mean different things, some may confuse one for the other.

This post will focus on incurred and accrued expenses to better understand the accounting process.

Key takeaways

• Incurred means a company has taken on the obligation. Accrued means the obligation has been recorded before payment. Every accrued expense was incurred first, but not every incurred expense is accrued. The difference is timing: an expense paid within the same period is simply an expense, while one crossing into the next period becomes an accrued liability.
• Accruing affects two statements at once. The expense goes to the income statement and the unpaid obligation goes to the balance sheet as a current liability. Common cases are rent owed at month-end, interest between payment dates, wages for days already worked, employer payroll taxes, etc.
• Accrual accounting is required for larger US companies and under IFRS. Cash accounting is simpler and available to smaller businesses, which record income and expenses only when payment is made or received.

Incurred vs accrued: the main differences

	Incurred	Accrued
What it means	You have taken on the obligation	You have recorded an obligation not yet paid
Triggered by	Buying goods or services, or consuming a resource over time	Period end arriving before payment
Supporting document	Usually an invoice or purchase order	Often none yet
Where it appears	Income statement, as an expense	Income statement and balance sheet, as a current liability
Timing of payment	Same period or a later one	Always a later period
Amount	Known from the invoice	Frequently estimated

Every accrued expense started as an incurred expense. The reverse is not true.

Companies Incur Expenses By Doing Business

Incurring an expense is part of running a business regardless of the industry.

Incurred refers to being liable for a loss or an expense during the accounting period that would lead to actual or potential spending for your company.

Companies need to purchase goods or services to produce a product or perform a service. When your business enters a transaction to procure goods or a service, it owes money to the supplier and therefore incurs an expense.

For instance, a grocery store needs to purchase milk from the manufacturer to sell to its customers. When the grocery store needs to restock and order milk, it incurs an expense whether it pays upon delivery or on net terms. These expenses then become part of the Cost of Goods Sold or Services Sold.

However, a company can incur an expense in other ways.

When Do Companies Incur an Expense?

A business incurs an expense in two instances – upon purchase or when it consumes a resource.

Like the example above, operating expenses like supplies would be on purchase. However, companies also incur an expense due to the passage of time or consumption.

Interest expense is an example of an expense incurred over time. This means that even without a supporting document like a purchase order or an invoice, the company can incur an expense.

Companies Can Incur Expenses and Pay in the Same Reporting Period

As mentioned above, companies incur expenses whether the business paid cash or not. Companies often make cash payments at the point of sale for small items like supplies.

When companies pay for an expense in cash, the company records the transaction as a cash purchase that increases the corresponding expense while decreasing total cash.

For instance, if the business purchases supplies for $1,000, accounting records will show a debit to Office Supply Expense and a credit to the Cash account. As a result, Supplies expense will increase while cash will decrease. However, not all cash payments are for incurred expenses. Companies may pay for expenses in advance like Prepaid Rent and Insurance.

Companies may also incur an expense paid in the next accounting period. Scenarios like this usually happen when the company buys on trade credit, meaning the supplier delivers now and bills later, or when the invoice has not arrived by period end. Expenses in that second category are recorded as accrued expenses.

What are Accrued Expenses?

Accrued refers to an expense incurred but not paid in the same reporting period. Accrued expenses are unpaid financial obligations that lack an invoice or documentation. These accrued expenses are current liabilities recorded on the balance sheet that the company should pay within the next 12 months.

A company needs to incur expenses first before it records an accrued expense. Accruals are only required when companies do not pay incurred expenses at the end of the period.

Consider this scenario.

Suppose a business incurs rent for May amounting to $5,000, but the actual payment happens on June 5. In that case, the company needs to record the accrued expenses liability, Accrued Rent Expense, by the end of May.

Accrued expense = cost for the full period × portion of the period that has passed,
where payment has not yet been made.

For the rent example, the full month of May has passed, and nothing has been paid, so the accrual is the full $5,000.

Aside from rent, companies often record accrued expenses for the following:

Accrued Interest

When your company takes out a loan, payment due dates don’t always fall at the end of the period.

For instance, a company borrowed from a bank, and principal and interest payments are due on the 15th of the following month. If the business follows a calendar year and ends on December 31, the next payment will be on January 15. Since the company owes interest from December 16 to 31, it needs to record an accrued expense for interest incurred for 16 days.

Worked example

A company borrows $50,000 at 6% annual interest. Payments fall on the 15th of each month, and the financial year ends on 31 December. Interest for 16 days, from 16 to 31 December, has been incurred but not paid.

• Daily interest: $50,000 × 6% ÷ 365 = $8.22
• Accrual: $8.22 × 16 days = $131.51

31 December

• Debit Interest Expense $131.51
• Credit Interest Payable $131.51

When the payment clears on 15 January, the $131.51 already recorded clears the liability, and only the January portion becomes a new expense.

Unremitted Taxes

Companies also record accrued expenses for unpaid taxes.

Tax payment deadlines do not coincide with the end of the reporting period, but companies still have to record tax expenses for the period. For instance, the income tax payment deadline for a calendar year could be on July 31.

By December 31, the company needs to recognize Income Tax Expense and record an accrued liability for Income Tax Payable.

Companies also need to record accrued expenses for employer payroll taxes to cover Social Security and insurance not remitted at the end of the period.

Worked example: employer payroll taxes

A company owes employees $12,000 in wages for days worked before period end. Employer payroll taxes on that amount come to 7.65%, or $918. Neither has been paid.

Period end

• Debit Salaries Expense $12,000
• Debit Payroll Tax Expense $918
• Credit Salaries Payable $12,000
• Credit Payroll Taxes Payable $918

Both liabilities clear when the payroll run and the tax remittance go out in the following period.

Unpaid Salaries

Another familiar scenario where companies record accrued expense is when pay periods do not coincide with the accounting period. For instance, the cut-off for calculating monthly payroll is on the 5th and 20th of the month.

For instance, at the end of November 30, the company would have owed employee wages for ten days from the 21st to the 20th. As a result, the business needs to report accrued expenses for salaries owed.

How to record an accrual, step by step

1. Identify expenses incurred before period end with no payment and no invoice.
2. Work out the amount. Use the contract or invoice where one exists, and a reasonable estimate where it does not.
3. Post the entry on the last day of the period. Debit the expense account, credit the matching liability account.
4. Reverse the entry on the first day of the next period, if your system uses reversing entries.
5. Record the payment normally when it happens.
6. Check the liability account back to zero once settled. A balance left behind usually means the accrual was reversed twice or never reversed at all.

Reversing entry example

Using the $5,000 May rent paid on 5 June:

31 May

• Debit Rent Expense $5,000
• Credit Accrued Rent Expense $5,000

1 June, reversal

• Debit Accrued Rent Expense $5,000
• Credit Rent Expense $5,000

5 June, payment

• Debit Rent Expense $5,000
• Credit Cash $5,000

Reversing on day one means the June payment gets recorded the ordinary way, with no risk of counting the same $5,000 twice.

Month-end accrual checklist

• Unpaid rent or lease payments for the period
• Interest on loans between payment dates
• Wages for days worked after the last payroll cut-off
• Employer payroll taxes on those wages
• Utilities, phone and internet used but not yet billed
• Professional fees for work already delivered
• Goods or services received where the supplier invoice has not arrived
• Income tax for the period
• Last period’s accruals reversed and cleared

Recording Accrued Liabilities is a Must Under Accrual Accounting

When preparing financial statements, companies commonly use two methods – cash basis and accrual basis.

Under the accrual basis, companies record transactions when they happen rather than when money moves. It gives a more accurate picture of a company’s financial position, which is why it is required for larger companies and under international standards.

Companies accrue expenses to satisfy the requirements of the accrual basis of accounting – companies have to record expenses when incurred and revenue when earned rather than when the business receives cash.

As a result, companies record income even if they have not collected cash from customers and record expenses even if they have not received a bill or invoice yet.

On the other hand, cash basis accounting is more common for smaller businesses. Under the cash accounting method, companies record income and expenses based on when money changes hands. This method is straightforward since the basis for recording entries depends on cash flow.

Cash Vs. Accrual Accounting Differences and Application

The main difference between cash and accrual accounting lies in the “timing.”

Small businesses prefer a cash basis as they don’t have to pay taxes for unpaid goods or services, which improves cash flow. Meanwhile, the accrual basis is more resource-hungry and complicated, as accounting teams have to prepare accruals at the end of the period. At the beginning of the next period, they have to reverse some accruals.

Large companies required to follow Generally Accepted Accounting Principles naturally report financial statements using accrual-basis accounting. In the US, GAAP regulations apply to publicly listed companies through SEC filing requirements.

US tax law sets a separate threshold. Under Section 448(c) of the Internal Revenue Code, a business must use the accrual method for tax purposes once its average annual gross receipts over the prior three years exceed a set limit. The Tax Cuts and Jobs Act set that figure at $25 million in 2017, and it is adjusted for inflation each year. For 2026, the limit is $32 million. Businesses below it can choose the cash method. (1)

The International Financial Reporting Standards or IFRS, the prevailing standard-setting body that governs standards for preparing financial information internationally, sets the requirements for preparing financial statements through International Accounting Standard 1. (2)  IAS 1 also requires entities to prepare all financial statements except for the Statement of Cash Flows to use the accrual basis of accounting. (3)

Accrued Expense Vs. Accounts Payable

Companies that purchase goods and services using trade credit record the transaction under a current liability account – Accounts Payable. (4)

The Accounts Payable account is different from Accrued Expense Liability, as payables are short-term debts. Offering trade credit is so common that about half of businesses in both Eastern (5) and Western Europe offer trade credit to business clients, so it’s common for companies to have Accounts Payable under the current liability section. (6)

Another difference lies with the certainty of the amount. Companies estimate accrued expenses, and the actual cash paid could change upon settlement. Meanwhile, companies pay the invoice amount for Accounts Payable, and unless there is an error in the invoice, the amount recorded as payable should also be the amount paid to settle the expense.

Why Understanding Key Accounting Terms Matters

Companies today see an urgent need for automating accounting processes to make financial statement preparation faster and less expensive while improving the reliability of financial data. The artificial intelligence market in accounting is already a $1,721.9 million market in 2021, with a forecasted compound annual growth rate of about 45% from 2021 to 2028. (7)

Automation is changing the role of finance teams, and as companies introduce more technologies to improve efficiency, every employee will be part of the accounting process. Today, smart expense management tools like Envoice are already using the information submitted by employees.

With automated checks and verifications set up, transactions that go through AI reviews may end up directly in accounting records integrated with the app. However, companies cannot rely on technology alone – employees should also do their part to ensure the accuracy and reliability of financial data.

Emerging technologies will continue to improve and upgrade, but they will never completely replace the human component. Whether they work with the accounting department or not, employees should understand accounting basics and terms like incurred and accrued to support a shift towards a leaner and more efficient team.

Experience how emerging technology allows companies to increase expense visibility; explore the Envoice app now.

FAQ

1. Is an incurred expense the same as an accrued expense?

No. Incurred means the obligation exists. Accrued means it has been recorded without being paid. An expense incurred and paid on the spot is never accrued.

2. Can an expense be incurred but never accrued?

Yes, and most are. Anything paid within the same reporting period is recorded simply as an expense.

3. Is an accrued expense a debit or a credit?

Both. The company debits the expense account and credits the corresponding liability account. On payment, it debits the liability and credits cash.

4. Where do accrued expenses appear in the financial statements?

On the income statement as an expense for the period, and on the balance sheet as a current liability until settled.

5. What is the difference between accrued expenses and accounts payable?

Accounts payable covers invoiced amounts, so the figure is known. Accrued expenses cover obligations with no invoice yet, so the amount is frequently estimated.

6. Do small businesses have to use accrual accounting?

Not necessarily. US businesses under the Section 448(c) gross receipts threshold, $32 million for 2026, can use the cash method for tax. Companies reporting under GAAP or IFRS use the accrual.

7. Do accrued expenses have to be reversed?

Not always, but it is standard practice. Reversing on the first day of the new period means the eventual payment is recorded normally, without double counting.

8. What happens if an accrual is missed?

Profit is overstated and liabilities understated for that period. The expense then lands in the following period, distorting both sets of figures.

Article sources:

(1) https://sgp.fas.org

(2) https://www.iasplus.com

(3) https://www.iasplus.com

(4) https://www.freshbooks.com

(5) https://group.atradius.com

(6) https://group.atradius.com

(7) https://www.globenewswire.com