What is expense accrual?

An expense accrual is an accounting entry that recognizes an expense incurred but not yet paid or invoiced, ensuring expenses are recorded in the period they occur rather than when payment is made. For professional service firms, common accruals include contractor invoices not yet received, bonuses earned but not yet paid, and services consumed but not yet billed by vendors. Proper accruals ensure financial statements accurately reflect the period's actual expenses.

Key characteristics

• Records expenses in the period incurred, not when paid

• Estimates amounts when exact figures are unavailable

• Reversed when the actual expense is recorded

• Required for accurate accrual basis accounting

• Common items: contractor costs, bonuses, utilities, professional fees

• Improves the matching of expenses to related revenue

Why it matters for professional service firms

Expense accruals ensure financial statements reflect reality. Without accruals, a month with significant contractor work but no contractor invoices yet received appears more profitable than it actually is. The next month, when invoices arrive, it appears worse. Accruals smooth this distortion by recording expenses when incurred. Professional service firms should accrue known significant expenses monthly, particularly contractor costs, bonuses, and any services received but not yet invoiced. This discipline provides accurate monthly performance visibility.

Real-world example

Michelle's firm had wild monthly profit swings: some months looked great, others terrible. Investigation revealed no expense accruals. December used heavy contractor support ($35K), but contractors invoiced in January. December showed falsely high profits; January showed falsely low profits. Implementing expense accruals: estimate contractor costs monthly based on hours worked, accrue bonus expense monthly as earned, and accrue known recurring expenses not yet invoiced. Results: monthly profit became much more consistent and predictable. Management could trust monthly numbers rather than waiting until quarter-end, when everything evened out.