What are accrued expenses?

Accrued expenses refer to costs that a business has incurred during a specific accounting period but has not yet paid. This concept is vital for understanding how expenses are recorded in financial statements because it aligns with the accrual accounting principle, which mandates that expenses should be recorded when they are incurred, rather than when they are actually settled in cash.

This practice ensures that the financial statements accurately reflect the company's financial position and performance within a specific time frame. For instance, if a company receives a service in December but pays for it in January, the expense must be recognized in December to provide a true picture of that month’s costs.

Other options do not accurately depict what accrued expenses are. Payments made in advance for services refer to prepaid expenses, which are distinct from accrued expenses. Loans that do not require collateral pertain to liabilities and financing arrangements rather than incurred expenses. Lastly, while some expenses may indeed be mandatory by law, this does not define accrued expenses, which are primarily about the timing of incurred costs versus payment.