What is Expense Accrual? Definition & Guide

Expense Accrual

The accounting practice of recording expenses in the period they're incurred rather than when cash is paid, aligning costs with the revenue they generate under GAAP's matching principle.

Victoria Landsmann

•June 23, 2026•

5 minute read

What is Expense Accrual?

Expense accrual is the process of recording a cost on the income statement in the accounting period when it's incurred, even if the company hasn't received an invoice or made a payment yet. The accrued amount is simultaneously recorded as a current liability on the balance sheet, reflecting the company's obligation to pay.

This treatment follows GAAP's matching principle: expenses should be recognized in the same period as the revenue they help generate [1]. Without accruals, a company that receives consulting services in March but doesn't get billed until April would understate March expenses and overstate March profit. The April financial statements would then show an expense that belongs to March, making both months inaccurate.

Cash basis accounting takes the opposite approach, recording expenses only when payment leaves the bank account. While simpler to maintain, cash basis creates timing gaps that distort financial performance. US GAAP requires the accrual method for all publicly traded companies and any organization that needs audited financial statements [2].

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How Does Expense Accrual Work?

The mechanics of expense accrual involve two journal entries separated by time.

Recording the accrual (period-end adjusting entry): When a company has received goods or services but no invoice has arrived by the close of an accounting period, the finance team records an adjusting entry. The entry debits the relevant expense account (increasing expenses on the income statement) and credits an accrued expenses liability account (increasing liabilities on the balance sheet).

Reversing and replacing (following period): At the start of the next period, the adjusting entry automatically reverses. When the actual vendor invoice arrives, it's processed through accounts payable using the standard payment workflow. The net result: the expense appears in the correct period.

A concrete example: a 500-person company sends a regional sales team on a four-day trip that spans month-end. Flights, hotels, and meals totaling $47,000 are consumed in the last three days of June and the first day of July. Without accrual, June's financial statements would miss $35,000 of travel costs that were genuinely incurred in June. The finance team records a $35,000 accrual to capture June's share, then reverses it in July when the actual accrued expense invoices arrive.

Expense Accruals vs. Accounts Payable

Finance teams often confuse accrued expenses with accounts payable because both represent money the company owes. The distinction comes down to documentation.

Characteristic	Accrued Expense	Accounts Payable
Invoice received?	No \u2014 amount is estimated	Yes \u2014 exact amount is known
Recording trigger	Passage of time or service consumption	Receipt of vendor invoice
Amount certainty	Estimate based on contracts or history	Exact per invoice
Balance sheet line	Accrued liabilities (current)	Accounts payable (current)
Common examples	Unbilled wages, utilities, interest	Supplier invoices, vendor bills
Adjustment needed?	Yes \u2014 reversed when invoice arrives	No \u2014 already at actual amount

The practical impact of this distinction shows up at month-end close. Accrued expenses require judgment and estimation, which introduces the risk of over- or under-accruing. Accounts payable entries are straightforward because the invoice provides the exact amount. Finance teams that automate expense matching reduce the estimation gap by capturing transaction data closer to the point of purchase.

Best Practices for Accruing Expenses

Standardize accrual templates. Create a consistent format for recording accrued expenses across departments so every team member estimates and documents entries the same way. This reduces the variation that makes monthly close reconciliation unpredictable [3].

Set materiality thresholds. Not every unbilled cost justifies a manual accrual entry. Many finance teams set a floor (commonly $1,000 to $5,000) below which expenses are recognized when invoiced rather than accrued. This balances precision against the administrative cost of tracking small accruals.

Reconcile accruals monthly. Compare the accrued liability balance against actual invoices received in the following period. Persistent variances between estimated accruals and actual invoices signal a systemic estimation problem, such as outdated contract terms or changing vendor pricing.

Separate travel accruals from operating accruals. T&E accruals have shorter settlement cycles than most operating accruals. A hotel bill typically arrives within days, while a consulting invoice might take 30 to 45 days. Grouping them together in one accrued liability bucket obscures the timing profile and makes financial reconciliation less reliable.

Use reversing entries. Set accrual journal entries to auto-reverse on the first day of the following period. This prevents the common error of double-counting an expense when both the accrual and the actual invoice end up recorded in the same period.

When Should You Consider Cash Basis Accounting?

Cash basis accounting records expenses only when payment occurs, which is simpler but less accurate than accrual accounting. It's a legitimate choice in specific situations.

Small businesses with straightforward operations and no external investors or lenders often use cash basis because it requires less bookkeeping overhead. The IRS permits cash basis for businesses below the gross receipts threshold outlined in Publication 538 [4]. Sole proprietors, freelancers, and service businesses with minimal recurring expenses and no inventory frequently operate on cash basis without issue.

However, any company that carries inventory, has investors requiring audited financials, or exceeds the IRS gross receipts threshold must use accrual accounting. Cash basis creates blind spots in financial reporting: a company could appear profitable in a month where it simply delayed paying its bills. For companies managing corporate travel programs, accrual accounting is essential because trips booked in one period often generate expenses across multiple periods. Navan captures prepaid travel costs alongside accrued expenses in real time, closing the timing gap that cash basis accounting leaves open.

Sources

[1] AccountingTools, "Accrued Expenses Definition," 2026, https://www.accountingtools.com/articles/what-are-accrued-expenses.html

[2] FinQuery, "Accrued Expenses & Accrued Liabilities: Journal Entries, Examples & More," 2025, https://finquery.com/blog/accrued-expenses-liabilities-definition-example-journal-entry/

[3] insightsoftware, "Accrued Expenses vs. Accounts Payable: Critical Differences Finance Teams Miss at Close," 2025, https://insightsoftware.com/blog/accrued-expenses-vs-accounts-payable-critical-differences-finance-teams-miss-at-close/

[4] IRS, "Publication 538: Accounting Periods and Methods," 2025, https://www.irs.gov/publications/p538

Accrual Accounting: The broader method of recording revenues and expenses when earned or incurred, forming the foundation for expense accrual practices.
General Ledger: The master accounting record where all journal entries, including accrued expense entries and their reversals, are posted and tracked.
Financial Close: The end-of-period process of finalizing all transactions and adjusting entries, including accruals, to produce accurate financial statements.