Introduction
Every business has costs that don’t get paid right away. Maybe the electricity bill hasn’t arrived, or a consultant has finished work but hasn’t sent the invoice yet. These unpaid costs are still real and belong to the time the service was used. In accounting, these are called accrued expenses. They might not show up in the bank account yet, but they need to be recorded to keep the books fair and up to date. This blog explains what accrued expenses mean, how they work in Indian businesses, and why recording them on time helps avoid confusion during tax filing, audits, or financial reviews.
What are Accrued Expenses?
There are times when a business uses a service, finishes some work, or receives something, but hasn’t paid for it yet. Even though no money has gone out, the cost is still real. That’s what an accrued expense is. It’s an expense that’s already due, but the payment is still pending.
This usually happens at the end of a month or financial period. Let’s say employees have worked through March, but salaries will be paid in April. That salary belongs to March. It doesn’t matter if the actual payment happens later; the cost is linked to the work that’s already done. So it has to be shown in March’s accounts.
Accrued expenses help keep business accounts fair and accurate. They make sure the expenses are shown in the same period as the activity, not pushed forward just because the money hasn’t gone out yet.
Why Recording Accrued Expenses Is Helpful for Businesses
Even if money hasn’t gone out yet, recording expenses that are due can make a big difference. Here’s why it’s useful for any business:
Shows the real cost of running the business: Sometimes, services are used this month, but the payment happens next month. If the expense is not recorded now, the profit may appear higher than it is. Accrued expenses fix that.
- Makes financial reports accurate: When all costs are recorded in the month they belong to, monthly or quarterly reports become more honest. This helps compare performance across months in a fair way.
- Helps during audits or tax filing: If books are missing some expenses, there can be issues later. Recording everything properly helps avoid confusion and shows the full picture.
- Better planning for cash and payments: When pending costs are listed clearly, it becomes easier to plan how much money is available and what payments are coming up.
- Makes reports more trustworthy: Banks, partners, or investors may ask to see the accounts. If the records include all unpaid costs too, it shows that the business is managed well and professionally.
So, even though it may feel like extra work, noting down expenses that are due (but not yet paid) helps the business stay organised, accurate, and ready for any checks or planning needs.
How to Record Accrued Costs
Accrued expenses typically don’t arrive as bills or notifications and often require manual entry or automated journal adjustments within the accounting system. They have to be entered manually at the right time, usually during monthly or year-end account closing. These are costs that haven’t been paid but still belong to the current period. If they’re not recorded, the books may overstate profit and understate liabilities.
The standard way to record these is through an accrued expense journal entry. It’s simple once the business knows what’s due and when it became payable.
Here’s how it works:
When the expense is recognised:
- Debit the expense account (like salary, interest, rent, or electricity)
- Credit a liability account (usually called “Accrued Expenses” or “Outstanding Expenses”)
This shows the cost in the current month’s profit and loss, and the unpaid amount in the balance sheet under liabilities.
Example:
A business pays ₹1,00,000 as monthly rent, but the landlord’s invoice arrives late. The accounts team is closing books on June 30. The rent for June is due, even if the bill hasn’t come.
Journal entry on June 30:
Rent Expense A/c Dr. ₹1,00,000
To Outstanding Rent A/c ₹1,00,000
This ensures June’s rent is recorded in June’s profit and loss account. Later, when the payment is made, the liability is cleared:
Outstanding Rent A/c Dr. ₹1,00,000
To Bank A/c ₹1,00,000
Common accounts where accrual entries are made:
- Salaries and wages
- Rent Payment
- Utility bills (electricity, internet)
- Interest on loans
- Professional fees
- Commissions due to agents or distributors
Most of these are recurring and predictable, so it’s possible to estimate them if bills haven’t been received yet.
Accrued Expenses vs Prepaid Expenses
Some costs are booked before they’re paid. Others are paid ahead of time, before the benefit is received. These two are handled differently in accounting, even though both are common in day-to-day business.
Accrued expenses are unpaid costs that belong to the current period.
Prepaid expenses are payments made in advance for future use.
Point of Difference |
Accrued Expenses |
Prepaid Expenses |
|---|---|---|
When does it happen? |
After service is used, before payment |
Before service is used, after payment |
Where is it shown? |
Liability side of the balance sheet |
Asset side of the balance sheet |
Accounting entry |
Expense is recorded now, cash goes later |
Cash is paid now, the expense is spread over months |
Simple example |
March salary paid in April |
Full-year insurance premium paid in advance |
Examples from regular business life:
- A company uses an advertising agency’s services throughout June but gets billed in early July. The cost belongs to June, this is an accrued expense.
- The same company pays ₹1,20,000 in March for office rent covering April to June. That’s a prepaid expense, and only one-third is counted as a cost each month.
- Both are about timing, not just payment. One reflects a cost owed, the other a benefit booked ahead. Mixing them up can throw off profit reports and tax calculations.
- Carefully tracking both helps business owners know what’s still payable and what’s already been paid for but not used up yet. Especially near the financial year closing, this can affect how profit looks on paper and whether tax estimates are accurate.
How Accrued Commission, Interest & Professional Fees Are Handled
Not every unpaid expense is about rent or salaries. In many Indian businesses, a large chunk of month-end liabilities comes from other heads that don’t always get attention upfront, like commissions, interest on borrowings, or pending professional service charges. These too are part of accrued expenses, and they need proper entries to reflect the true financial position.
Commission That’s Earned But Not Paid
If sales agents or distributors earn a commission after closing a deal or collecting payment from a client, it becomes due at that point not when the business decides to release the money. So if a sales rep hits a ₹5 lakh target in March and the payout is planned for April, the commission still needs to be booked in March.
Example journal entry:
Commission Expense A/c Dr. ₹25,000
To Accrued Commission A/c ₹25,000
This way, the business shows the true cost of earning revenue in the same period when it happened.
Interest That Builds Up Quietly
Loan interest often accrues daily or monthly, even if the repayment is scheduled quarterly or annually. For example, a business might be using an overdraft facility or a term loan, and while the EMI hasn’t gone out yet, the interest keeps accumulating.
To keep accounts accurate, this interest needs to be entered as due when it’s incurred.
Interest Expense A/c Dr. ₹12,000
To Accrued Interest A/c ₹12,000
This ensures the cost of borrowing is reflected correctly in that month’s profit calculation, not pushed forward to the payment date.
Service Providers Who Bill Late
Law firms, tax consultants, tech vendors, or freelance designers might finish their work this month but bill later. Say, a CA files a company’s GST returns in March, but the invoice comes in April. That’s still a March expense and should be recorded accordingly.
Professional Fees A/c Dr. ₹18,000
To Accrued Expenses A/c ₹18,000
This is especially important for businesses expecting a statutory audit or tracking monthly costs closely. If not recorded, March’s profit would appear higher than it is.
Accrual vs Cash Basis
There are two main ways to keep business accounts: accrual basis and cash basis. Both are acceptable in India, but they tell very different stories about profit, cost, and financial health.
Cash Basis – only when money moves
In the cash method, income and expenses are recorded only when money is received or paid. If no payment is made, no entry is recorded. This approach is simple but not always accurate.
For example, if ₹2,00,000 worth of sales were made in March but the customer pays in April, it won’t appear in March’s books. Similarly, if rent is paid late, it won’t be seen as an expense until payment is made.
This system is commonly used by small businesses and professionals who don’t maintain full books or who follow Section 44ADA or 44AD under presumptive taxation.
Accrual Basis – when income or expense is due
Under the accrual concept, the business records income when earned and expenses when incurred, not just when the money moves. This is the method followed by most companies, LLPs, and GST-registered businesses.
So if salaries for March are paid on April 7, they still count as March expenses.
Similarly, if a customer is billed in March and pays in April, it’s still treated as March income.
This method gives a more accurate view of what the business owes and what it has earned.
Key difference between accrual and cash basis:
Point |
Accrual Basis |
Cash Basis |
|---|---|---|
Timing of recording |
When expense or income is due |
When cash is paid or received |
GST/Tax impact |
Often preferred under GST for input credit |
Can be simpler for non-GST businesses |
Profit visibility |
Reflects true business performance |
May understate or overstate actual profits |
Accounting complexity |
Slightly more work, but more accurate |
Easier but less reliable for decision-making |
What’s more common in India?
Most registered businesses, especially those filing full ITRs or complying with GST, follow the accrual basis. It’s also required under the Companies Act and Accounting Standards for private limited companies. Cash basis is mostly seen among smaller traders, freelancers, and professionals opting for simplified taxation.
Conclusion
Accrued expenses may not always show up with a bill or alert, but they carry weight in the background of every business’s financial health. Whether it’s unpaid rent, pending salaries, delayed invoices from consultants, or interest that quietly adds up, these costs reflect real liabilities that can’t be ignored. By recording them properly, businesses maintain clean books, avoid overstating profits, and meet compliance standards more confidently. It’s not just about being technically correct; it’s about knowing what the business truly owes at any point in time.
Even for smaller firms or startups, understanding and applying the accrual concept helps in better planning, especially near the financial year-end or while preparing for audits and funding rounds. Whether accounting is done manually or using software, recognising what’s due (even if unpaid) is part of staying financially sharp.
In short, tracking accrued expenses isn’t just good practice. It’s a habit that keeps numbers honest and decisions grounded in reality
FAQs
1. Are accrued expenses the same as outstanding expenses?
Yes, more or less. In day-to-day Indian accounting, people often use outstanding expenses instead of accrued expenses. Both refer to costs that are due but not paid yet. For instance, unpaid salary for March? That’s counted as an accrued or outstanding expense by March-end.
2. Can accrued expenses be claimed as business expenses in tax filings?
Yes, if the business follows the accrual system, these costs can be claimed even before making the actual payment. So, something like accrued rent or professional fees can be treated as an expense for the year it’s due as long as entries are recorded properly and supported by some documentation, especially in case of a tax audit.
3. What happens if accrued expenses are not recorded?
If they’re missed, the books won’t show the full picture. Profits will look higher than they are, and the balance sheet won’t reflect the money that’s still owed. This could cause trouble during audits or while planning finances. Even for internal review, missing these entries can throw off decisions.
4. Are accrued expenses mandatory under Indian laws?
Yes, for businesses covered under the Companies Act or those following Indian Accounting Standards, accrual accounting is compulsory. Even many GST-registered firms use it. But small traders or professionals under 44AD or 44ADA often follow cash basis, where accrued entries aren’t needed.
5. Can startups and small firms use cash accounting to avoid complexity?
They can especially in the early stages or when turnover is within certain limits set under the Income Tax Act. But once the business grows or handles several vendor payments, accrual accounting starts making more sense. It reflects the real expenses and helps with financial clarity and external reporting.
6. Is it okay to combine all unpaid costs under one ‘accrued expenses’ head?
Yes, that’s fairly common in Indian books. Many small firms just create a single “Outstanding Expenses” or “Accrued Expenses” line on the balance sheet. That said, splitting them like rent, salaries, interest helps with better tracking, especially when payments are staggered or recurring.
7. How is accrued interest different from interest paid?
Accrued interest is what’s due but not paid yet, say, on a loan or credit line. Even if the bank will deduct it later, the expense still belongs to this month if using accrual accounting. This ensures the books reflect expenses when they are due, not just when payments are made.
8. Are accrued expenses used in Tally or other Indian accounting software?
Absolutely. Whether it’s Tally, Busy, Zoho Books, or others, most platforms let users record journal entries for accrued costs. Usually done through a journal voucher, this helps capture unpaid salaries, electricity bills, or commissions at month-end or year-end.
9. How are prepaid expenses handled differently from accrued ones?
They’re like two sides of the same coin. Prepaid expenses are paid early, for example, yearly insurance paid in one shot. That goes under assets. On the other hand, accrued expenses are pending payments for something already used, and those sit under liabilities.
10. Do auditors check accrued expenses closely?
Yes, they usually do, especially at year-end. Auditors want to be sure no due cost was left out, that all big-ticket items were included, and that the timing of expenses is accurate. This matters because even a few missed entries can make profits look better than they are.
