Accrued Expenses, Explained: A Guide for Finance Teams

Accrued Expenses, Explained: A Guide for Finance Teams Accrued expenses are routine balance sheet entries, but weak estimates can delay the close and draw audit scrutiny. Under GAAP, every expense must be recognized in the period it was incurred, whatever the timing of the invoice or payment. That gap between incurrence and documentation is where accounting teams spend a disproportionate share of month-end effort.

For controllers and accounting managers, the hard part is the many accrual line items that depend on estimates and late inputs from other teams. Accuracy rests on GAAP timing rules and reliable period-end data, while consistent journal entry mechanics keep those decisions correct in the ledger.

What Accrued Expenses Are and Why They Matter

An accrued expense is a cost incurred but not yet supported by a vendor invoice. In its place, the team records a journal entry that recognizes the expense and creates an offsetting liability. Without it, the expense vanishes from its period, profits are overstated, and the company violates the matching principle.

On the balance sheet, accrued expenses are current liabilities: obligations expected to be settled within one year. They sit alongside accounts payable, but the distinction matters for classification and audit documentation.

Two contrasts clarify what counts as an accrued expense: how it differs from accounts payable and from prepaid expenses.

How Accrued Expenses Differ From Accounts Payable

A received vendor invoice separates the two: once it arrives and is recorded, the obligation sits in accounts payable, with a known amount and documentation. Accrued expenses, by contrast, need management judgment.

Both appear as current liabilities, but combining them blurs the line between invoiced and estimated obligations that auditors need to assess completeness.

How Accrued Expenses Differ From Prepaid Expenses

Both arise from timing differences but sit on opposite sides of the cash flow cycle. An accrued expense is a benefit received but not yet paid for — a liability, like wages owed for work already done. A prepaid expense is the reverse — an asset, like prepaid insurance whose coverage period hasn’t fully elapsed.

Common Types of Accrued Expenses and Their Journal Entries

Every accrued expense follows the same double-entry pattern: Debit the expense account, credit an accrued liability account. The entry typically auto-reverses on the first day of the next period. Specifics vary by category, mainly reversal timing.

1. Wages and Salaries

When a pay period straddles two accounting periods, the wages that are earned but unpaid belong in the current period and must be accrued.

For those earned wages:

• Period-end: Debit Wages Expense / Credit Wages Payable
• Following month: Reverse the entry. When payroll runs, the actual payment records are processed normally.

Vacation pay accruals work differently: The liability builds as employees earn leave, and falls only when they take time off.

2. Interest Expense

When a loan accrues interest but no payment is due before period-end, that cost still belongs in the current period and should accrue in each open period until billed.

• Period-end: Debit Interest Expense / Credit Interest Payable
• Following month: Reverse the entry. When the lender’s invoice arrives, process through accounts payable normally.

With the rate and balance known, interest is among the easier accruals to estimate.

3. Income Taxes

Estimated income tax liabilities are accrued at period-end on income earned.

• Period-end: Debit Income Tax Expense / Credit Accrued Income Taxes Payable

Income tax accruals stay on the balance sheet until the tax is paid, quarterly or annually.

4. Utilities and Services Received Without an Invoice

When a company uses utilities or receives goods before the bill arrives, the expense belongs in the current period. An estimated bill not yet received is recorded as:

• Month-end: Debit Utilities Expense / Credit Accrued Utilities Payable
• Following month: Reverse the entry. Process the actual bill through AP when it arrives.

Because prior-period usage is a reliable guide, this estimate usually lands close to the final bill.

5. Travel Expenses

When employees travel by period-end but haven’t yet submitted expense reports, the costs still belong to the trip’s period. Estimated unreported travel expenses are recorded as:

• Period-end: Debit Travel Expense / Credit Accrued Expenses Payable
• Following month: Reverse the entry. When expense reports are submitted and approved, they are recorded normally.

This category is the most estimation-dependent, because the expense report itself may not arrive for weeks after the trip.

These categories cover most of what teams manage at each close, but errors compound fast when dozens of entries are handled manually across departments.

Why Accrued Expenses Create Challenges at Month-End Close

Accrued expenses are conceptually simple but operationally difficult, especially for travel and expense, where data arrives late and depends on inputs from outside accounting. That friction, from delayed submissions, disconnected systems, and manual estimates, consumes a disproportionate share of close effort.

Late Expense Reports and Submission Delays

Late expense reports create a structural timing gap that teams fill with estimates. Travel costs are incurred on the trip date, but submission, approval, and reimbursement happen later and, under GAAP, don’t move the expense to a later period.

Corporate expense policies often give employees days or weeks to submit, so costs incurred late in a period routinely stay unreported at close. According to The State of Corporate Travel and Expense 2026, a report from Skift and Navan, 71% of business travelers surveyed spend more than 30 minutes on each expense report. Long reports invite procrastination.

Even reports submitted on time must clear approvals and review before posting, so those still in process need accrual entries too.

Manual Reconciliation and Estimation Errors

With manual journal entries, teams forget to reverse prior-period accruals or book both an accrual and an AP entry for one obligation. Outdated data also distorts estimates when spending patterns shift.

A Forrester Consulting Total Economic Impact™ study commissioned by Navan, based on a composite organization, found that Navan customers save 24 minutes per expense report and cut the time finance and accounting teams spend auditing expenses by 40%. That saving reflects the manual work that piles up when accruals lean on spreadsheets instead of system-captured data. It can also ease reconciliation-related review work.

Fragmented Systems and Data Quality Gaps

Accrual accuracy depends on inputs from every department with a T&E budget, yet finance and accounting teams rarely control whether those details arrive before close. When expense systems aren’t integrated with the general ledger, accountants pull period-end reports, reconcile totals, and post entries by hand. Each step risks errors, and balances are only as current as the last reconciliation, often days old at close.

Best Practices for Reducing Accrual-Related Close Friction

Accrual management improves when teams shift from reactive period-end estimation to continuous data collection. These practices target the root causes of errors and delays, not more review steps.

Set Materiality Thresholds to Concentrate Estimation Effort

Not every accrual needs a data-driven estimate. Documented materiality thresholds help your team decide which categories require precise accruals and which can be estimated simply or dropped, since documenting an entry that costs more than it saves isn’t worth the effort. Concentrate estimation work on high-dollar, high-variability categories like travel, professional services, and commissions for more accurate financials with less close-cycle overhead.

Document Estimation Methodologies and Enforce Reversal Rules

A written accruals policy should specify the estimation methodology per category, the documentation each entry needs, the reversal timing, and the named preparer and reviewer. For T&E, define an estimation hierarchy: Use booking system data for known trip costs first, historical run-rate analysis for predictable departments, and IRS per diem rates to substantiate covered travel when the time, place, and business purpose are documented, even without detailed cost records. Make the reversing entry a required default, because without it stale accruals linger and expenses get double-counted when invoices arrive, misstating both the income statement and the balance sheet.

Distribute Close Work Across the Period

When reconciliations happen only at close, errors surface under time pressure on stale data. Continuous accounting spreads the work across the month, so weekly reviews of outstanding travel and mid-period checks cut the adjustments your team faces at close. A month-end close checklist helps teams spot which trips may need accruals before expense reports arrive.

Unify Data Sources to Reduce Manual Inputs

To improve accrual accuracy, close the gap between when expenses occur and when they are recorded in your ledger. When card transactions are captured at the point of swipe and coded to GL accounts and cost centers, the accrual is based on a known transaction. Direct ERP integration keeps both systems consistent and curbs chart-of-accounts drift caused by miscoded transactions at close.

How Real-Time Expense Capture Improves T&E Accruals

Real-time expense capture improves T&E accruals by recording transaction details as spending occurs, not at month-end. Estimates exist only because of a timing gap: Employees spend money, and accounting teams don’t see the details until days or weeks later.

When card transactions are recorded as they happen, with automatic GL coding and cost center assignment, the accrual for unsubmitted reports shrinks. Your team can reference actual charges, already categorized and coded, for the last week of the quarter.

Finance teams using Navan save time on expense processing, primarily by automating categorization, policy checks, reconciliation, approvals, and GL coding.

Navan Expense captures 130-plus data points per transaction, and Expense Agent reads receipt line items, applies the GL code from company policy, and writes compliant descriptions. When that data flows directly to connected accounting systems rather than through a month-end batch, the close becomes more of a confirmation step, in which the team verifies that recorded transactions are complete and correctly classified.

Real-time data also changes what the estimate rests on. Spreadsheets and delayed submissions force estimates from historical averages or run rates that assume spending still matches the past. Known transactions eliminate that guesswork, so estimation risk can drop significantly and material post-close adjustments become less likely.

Teams automating this step focus on expense report automation and travel reconciliation, so approved data reaches accounting systems faster, with less manual work.

From Estimation to Observation

Accrued expenses shift from estimation to observation once your team closes the data gap that makes them slow. The accounting is a simple sequence: Recognize the expense in the period incurred with an offsetting liability, then reverse it when docu

mentation arrives. The complexity was never the entries; it’s the gap between spend and visibility.

When you close that gap with real-time transaction feeds and direct ERP integration, automated GL coding can convert your highest-risk estimates into recorded observations. Your close window may shorten and your balances may grow more accurate, so your team can spend less time chasing documentation and more on analysis.