Accrued expenses guide for UK businesses

The principle of accrued expenses is an important one in business accounting.

When you use an accruals balance sheet you’ll be able to produce more meaningful business data, and get a better handle on your company’s financial health.

This guide covers a definition of accrued expenses, examples of accrued expenses and a run through of how journal entries can be used to reconcile accrued costs for your company.

What are accrued expenses?

Accrued costs - which are also simply called accruals - are those a business knows they’re liable to pay at a given date within the next 12 months, like rent, employee commission or loan repayments².

By using the accrued expense method of reporting, businesses can produce more accurate financial statements.

To give an example, perhaps you’ve entered into an agreement with a supplier to buy a certain quantity of products. However, you’re still waiting for the goods to be delivered, so you haven’t yet settled your bill, and you may not even have an accurate invoice available. The estimated cost of these goods would be captured as an accrued expense at the time it occurs - when you enter into the supplier agreement.

Accrued expenses vs. prepaid expenses

Accrued expenses are pretty much the opposite of prepaid expenses.

While accrued expenses represent commitments you’ve made to pay someone in future for goods or services, prepaid expenses work the other way around. With prepaid expenses you’ve already made payments towards goods or services which have not yet been delivered - a downpayment or deposit on a supplier invoice for example.

Accrued expenses are viewed as a liability, while prepaid expenses are seen as an asset.

What is the accrual accounting method?

The accrual accounting method³ describes the process of costs being recorded in a company’s financial statements when they’re incurred - rather than when they’re paid. On the flipside of this, you can also have accrued revenues - which are payments which you’re expecting to receive but which have not yet been made to you.

The accrual accounting method is different to the cash accounting method, in which items are only entered into the company’s financial statement when cash changes hands.

The cash accounting approach risks misrepresenting a company’s financial position as it doesn’t cover known liabilities which will need to be paid in future, or known income which is due to be paid.

It’s therefore not a recommended method for larger businesses - and some business types in the UK are not allowed to follow this approach at all, like Limited Companies, for example¹.

How to calculate accrued expenses

It’s helpful to note that expenses - including accrued expenses - can be split down into operating and non-operating expenses.

Operating expenses are the costs of running a business day to day. They’re usually regular, predictable and ongoing - like the cost of paying employees or buying goods to sell.

Non-operating expenses on the other hand, tend to be irregular charges which don’t stem from the main running of the business. Common examples may be interest on a loan, or the costs of relocating to a new premises.

Operating costs are often split out from non-operating costs in order to give a clearer picture of the ongoing financial performance of a company. By removing one off and irregular charges, and anything not involved with the day to day activities of the company, it’s easier to see how healthy the financial performance on an ongoing basis is.

How to reconcile accrued expenses

When you use accrual accounting you’ll need to reconcile accrued expenses with paid expenses to keep your books balanced over time.

You’ll want to take some professional advice to make sure you’re keeping your company accounts straight - but here’s the basic process as an overview:

By debiting the expense account you’re increasing the amount shown on your income statement as owed, and crediting the liability correspondingly increases your businesses liabilities on your balance sheet.

Once the payment has been made you need to reconcile the accounts.

Manage expenses with Wise Business

Spend less time worrying about managing your company finances, and more on growing your business, with the Wise account.

Wise Business account offer linked debit cards for you and your team, so you can manage daily expenses more easily. Plus, multi-user access features mean you can set and manage user permissions so everyone has the financial tools they need to do their jobs - leaving you to concentrate on the things that make your business unique.

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*Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.

Sources:

1. UK government - Who can use cash basis accounting?
2. HMRC - Business Income Manual
3. FRC - Financial Reporting Standards, UK and Republic of Ireland