What is an accrual?
An Overview of Accrued Expenses
Balance sheets can be tricky to understand, especially if you're not a financial expert. However, it's important to have a basic understanding of the different elements that make up a balance sheet, as they can give you valuable insights into the financial health of your business. In this post, we'll take a closer look at one element in particular—accrued expenses, also known as accruals.
What are Accrued Expenses?
In short, accrued expenses are expenses that have been incurred but have not yet been paid. For example, let's say your electricity bill is due on the 1st of next month, but you won't actually receive the bill until the 5th. The electricity used between the 1st and the 5th is an accrued expense. Once the bill arrives and you pay it, the accrued expense becomes a real expense.
Where do Accrued Expenses go on the Balance Sheet?
Accrued expenses typically go under the "current liabilities" section on a balance sheet. This is because they are generally short-term in nature and are therefore paid back relatively quickly. That being said, there are some accrued expenses that may last for several years (e.g., leases). These types of long-term accrued expenses would go under the "long-term liabilities" section on a balance sheet.
How do Accrued Expenses Affect my Business?
It's important to keep track of your accrued expenses because they represent a real liability for your business. If you don't account for them properly, your business could end up paying late fees or interest charges—and no one wants that! Moreover, if your accrued expenses become too high relative to your revenues, it could be a sign that your business is in trouble and may need to seek financing in order to make ends meet.
To sum things up, accrued expenses are expenses that have been incurred but have not yet been paid. They usually go under the "current liabilities" section on a balance sheet and can give you insights into the financial health of your business. Keep an eye on your accrued expenses so that they don't get too high and negatively impact your bottom line!