What Are Accrued Expenses? A Beginner's Guide

Accrued expenses are costs your business has already incurred but hasn’t paid for yet. It’s a key concept in accrual accounting and helps you get a clear and honest look at how your business is really doing, beyond just what’s coming in and out of your bank account.

Whether you run a hair salon in Melbourne, a landscaping business in Sydney, or a small consultancy in Brisbane, if you want your financial records to be accurate and up to ATO standards, you’ll need to wrap your head around how accrued expenses work.

This guide will break it down for you in plain English, no fluff, no finance degree needed. Let’s get into it.

What Exactly Are Accrued Expenses?

Accrued expenses refer to costs that have already occurred, but the money hasn’t been paid yet, nor has an invoice necessarily been received. These could be services rendered or goods used, where the liability has been created, but the transaction isn’t yet finalised with cash.

It’s basically the stuff you owe, whether it’s your employee wages, unpaid rent, or a utility bill that hasn’t arrived yet.

Unlike cash accounting, where you record expenses only when you pay them, accrual accounting says: “Hey, if the service has been used, it’s an expense, regardless of when you pay.”

Why Are Accrued Expenses So Important?

You might be thinking, “I’ll just track money when it comes in and out. Isn’t that enough?”

Not really.

Here’s why accrued expenses are essential for every growing Aussie business:

Gives a True Picture of Profitability

If you only record expenses when you pay them, you could be looking at artificially inflated profits. For example, if you forget to account for wages earned at the end of the financial year, your books will make it look like you made more than you actually did.

This leads to poor decision-making, spending too much, under-saving, or worse, paying more tax than necessary.

Prevents Financial Surprises

Imagine this: it’s the end of the quarter, you think you’ve got $15k in profit, so you treat yourself and invest in new equipment. But then, bam! A heap of bills lands in your inbox. Suddenly, you realise that $15k was never really yours to spend.

By accounting for accrued expenses, you already “see” those costs in your books, even if the cash hasn’t moved yet. That means fewer nasty surprises.

Improves Budgeting and Forecasting

Knowing what you’ve used and what you owe makes forecasting much more accurate. You’ll be able to budget for upcoming costs and set more realistic targets.

For example, if you regularly accrue $3,000 in wages at the end of the month, your forecasts will include that, helping you maintain control over your cash flow.

Keeps You Compliant with ATO and Industry Standards

Many Australian businesses, especially those registered for GST or earning over $10 million, are required to use accrual accounting. Not tracking accrued expenses means your reports might not comply with ATO guidelines, putting you at risk of penalties or inaccurate tax reporting.

Even if you're under the threshold, some grants, funding bodies, or bank loans require accrual-based reports. If you're not recording accrued expenses, you could be ruled ineligible.

Builds Credibility with Stakeholders

If you're presenting reports to investors, banks, or partners, you want them to trust your numbers. Financial reports that reflect the full financial picture, including what you owe, build credibility and confidence.

Would you trust a business that hides unpaid expenses just to look more profitable? Neither would they.

Common Examples of Accrued Expenses in Australia

Let’s run through a few real-world examples to ground the concept:

• Employee Wages – Your café staff works the last few days of June, but payday is July 3.
• Superannuation – Super accrues over time, even if paid quarterly.
• Electricity and Utilities – You use electricity in June, but receive the bill in July.
• Interest on Business Loans – Interest builds up daily, even if paid monthly.
• Legal or Accounting Fees – Your accountant does EOFY prep in June, and the invoice arrives in July.
• Rent – You use the premises throughout June, but the landlord invoices later.

If you’ve used it or owe it, it needs to be in your books.

Accrual Accounting vs. Cash Accounting: What’s the Difference?

Let’s break this down further so you’re crystal clear.

Cash accounting records expenses only when money is actually paid and income when it’s received. It’s simple and suited to sole traders or very small businesses.

Accrual accounting records expenses when they’re incurred and income when it’s earned, even if no money has changed hands yet. It gives a far more accurate picture of how your business is performing, which is why it’s the required method for most growing businesses in Australia.

Quick example: You get your car serviced for your plumbing business on 30 June, and the invoice arrives on 5 July. In cash accounting, the cost is recorded in July. In accrual accounting, it’s recorded in June, because that’s when the service happened.

If you’re serious about scaling your business or dealing with grants, banks, or ATO reporting, accrual accounting is the way to go.

How to Record Accrued Expenses: The Basics

You don’t have to be a bookkeeper to understand the process, but here’s a look behind the scenes.

Let’s say your employee earns $2,500 in wages by June 30, but you pay them on July 3.

At 30 June:

• Debit: Wages Expense $2,500
• Credit: Accrued Wages (Liability) $2,500

This recognises the cost now and shows you owe it.

On 3 July:

• Debit: Accrued Wages $2,500
• Credit: Bank $2,500

That clears the liability and reflects the payment.

Most accounting software like Xero, QuickBooks, and MYOB let you automate this. You can set up recurring journal entries, reverse accruals automatically, and keep a tidy audit trail.

Reversing Accrued Expenses

A crucial part of the process is reversing the accrual when the actual invoice or payment is recorded. If you don’t reverse it, you might accidentally double up the expense.

For instance:

• You accrue $3,000 in wages for June.
• In July, you record and pay the wage without removing the accrued liability.

Now your books show $6,000 in wages instead of $3,000.

Most cloud-based software automatically reverses entries, but if you’re doing it manually, keep an eye out.

How Do Accrued Expenses Affect Financial Statements?

Accrued expenses show up in two places:

In the income statement (profit & loss), they appear as expenses in the period they relate to, reducing your net profit accordingly.

In the balance sheet, they show up under current liabilities, as something the business owes.

This impacts your business valuation, borrowing capacity, and even your credibility with external parties.

Mistakes to Avoid

Let’s quickly cover a few common mistakes Aussie business owners make when dealing with accrued expenses:

• Ignoring the Need for Reversals – Not reversing the entry when the actual invoice/payment is received can throw off your numbers.
• Incorrect Timing – Recording the expense in the wrong period leads to inaccuracies in profit.
• Not Accruing Regularly – Leaving it until EOFY makes the process painful and error-prone. It’s better to accrue monthly or quarterly.
• Over-accruals Based on Guesstimates – Try to use realistic estimates based on past records or signed agreements.

Final Thoughts: Why It Pays to Stay on Top of Accrued Expenses

Whether you're a sole trader, a partnership, or managing a growing company, understanding accrued expenses gives you a clearer, more honest view of your business's financial health.

Here’s what it really comes down to:

• More accurate financials
• Better decision-making
• ATO compliance
• Improved cash flow forecasting
• Greater transparency for partners, banks, and investors

It might take a little more effort to track accrued expenses, but the benefits far outweigh the hassle. And once you set up good processes or use reliable accounting software, it becomes second nature.

Need Help?

If tracking accruals feels overwhelming, don’t stress. Reach out to a registered BAS agent or accountant near you. They'll help you set up a streamlined process, make sure you stay compliant, and avoid costly mistakes.