An accrued expense refers to an expense that a company has incurred but has not yet paid. In other words, it represents an obligation to make a future payment for goods or services that have been received or utilized, but the payment has not been made as of the end of the accounting period.

Accrued expenses are recorded on the company’s financial statements to ensure that the financial statements reflect a more accurate picture of the company’s financial position and performance during a specific period. The accrual accounting method, as opposed to the cash accounting method, requires companies to recognize expenses when they are incurred, not necessarily when the cash payment is made.

Here’s how the process of recognizing and accounting for an accrued expense typically works:

1. **Recognition of the Expense:**
– When a company incurs an expense but has not yet paid for it, the company recognizes the expense in its financial records. This is often done by recording an adjusting journal entry.

2. **Adjusting Journal Entry:**
– Debit the appropriate expense account on the income statement to recognize the cost.
– Credit a liability account on the balance sheet to reflect the obligation. This liability account is often called “Accrued Liabilities” or a similar name.

3. **Payment of the Accrued Expense:**
– When the company later pays the actual expense, a second journal entry is made.
– Debit the Accrued Liabilities account to decrease the liability.
– Credit the Cash account or another relevant account to reflect the payment.

Common examples of accrued expenses include:
– **Wages:** If employees have worked but have not been paid by the end of the accounting period.
– **Utilities:** If a company has received utility services but has not been billed or paid.
– **Interest:** Accrued interest on loans or other financial instruments.

Accrued expenses are an integral part of accrual accounting, helping to provide a more accurate representation of a company’s financial position and performance by recognizing economic events when they occur, not just when cash changes hands.