when a company accrues accumulates expenses its portion of unpaid bills also accumulates this increases both its expenses and liabilities 
accrual vs cash basis accountingaccrual accounting differs from cash basis accounting which records financial events and transactions only when cash is exchanged often resulting in the overstatement and understatement of income and account balances although the accrual method of accounting is labor intensive because it requires extensive journaling it is a more accurate measure of a company s transactions and events for each period this more complete picture helps users of financial statements to better understand a company s present financial health and predict its future financial position accrued expenses vs prepaid expensesaccrued expenses are the opposite of prepaid expenses prepaid expenses are payments made in advance for goods and services that are expected to be provided or used in the future while accrued expenses represent liabilities prepaid expenses are recognized as assets on the balance sheet this is because the company is expected to receive future economic benefit from the prepayment on the other hand an accrued expense is an event where a company has acquired an obligation to pay an amount to someone else but has not yet done so for example there is a lawsuit that the company is expected to lose so the company records the expense and a liability for the expected payment even though it has not been paid yet therefore it is literally the opposite of a prepayment an accrual is the recognition of something that has already happened in which cash is yet to be settled advantages and disadvantages of accrued expensesaccrued expenses theoretically make a company s financial statements more accurate while the cash method is more simple accrued expenses strive to include activities that may not have fully been incurred but will still happen consider an example where a company enters into a contract to incur consulting services if the company receives an invoice for 5 000 accounting theory states that the company should technically recognize this transaction because it is contractually obligated to pay for the service accrued expenses also may make it easier for companies to plan and strategize accrued expenses often yield more consistent financial results as companies can include recurring transactions in their financial reports that may not yet have been paid in addition accrued expenses may be a financial reporting requirement depending on the company and its u s securities and exchange commission sec filing requirements because of additional work of accruing expenses this method of accounting is more time consuming and demanding for staff to prepare there is a greater chance of misstatements especially if auto reversing journal entries are not used in addition a company runs the risk of accidentally accruing an expense that they may have already paid lastly the accrual method of accounting blurs cash flow and cash usage as it includes non cash transactions that have not yet impacted bank accounts for a large company the general ledger will be flooded with transactions that report items with no bearing on the company s bank statement nor impact to the current amount of cash on hand potentially makes financial statements more aligned to actual business operationsoften makes month over month financial statements more consistentmay yield more useful information for management to make decisions plansadheres to external financial reporting requirementsoften requires more time and resources to prepare compared to the cash method of accountingusually results in greater risk of misstatement accruals not reversing or accidental duplication may complicate some reporting by blurring cash usage and capital needsspecial considerationsa critical component to accrued expenses is reversing entries journal entries that back out a transaction in a subsequent period accrued expenses are not meant to be permanent they are meant to be temporary records that take the place of a true transaction in the short term every accrued expense must have a reversing entry without the reversing entry a company risks duplicating transactions by recording both the actual invoice when it gets paid as well as the accrued expense many accounting software systems can auto generate reversing entries when prompted accrued expenses are prevalent during the end of an accounting period a company often attempts to book as many actual invoices as it can during an accounting period before closing its accounts payable ap ledger then supporting accounting staff analyze what transactions invoices might not have been recorded by the ap team and book accrued expenses for companies that are responsible for external reporting accrued expenses play a big part in wrapping up month end quarter end or fiscal year end processes a company usually does not book accrued expenses during the month instead accrued expenses are booked during the close period example of accrued expensesa company pays its employees salaries on the first day of the following month for services received in the prior month so employees who worked all of november will be paid in december if on dec 31 the company s income statement recognizes only the salary payments that have been made the accrued expenses from the employees services for december will be omitted because the company actually incurred 12 months worth of salary expenses an adjusting journal entry is recorded at the end of the accounting period for the last month s expense the adjusting entry will be dated dec 31 and will have a debit to the salary expenses account on the income statement and a credit to the salaries payable account on the balance sheet 