Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Accruals and the Matching Concept: Accrued Expenses Explained

Updated 11 October 2026 · Fact-checked

The accruals (matching) concept says you record income and expenses when they are earned or incurred, not when cash moves. An accrued expense is a cost used up but not yet paid. Calculate it, debit the expense account, credit accruals, and show the credit as a current liability.

Understand Accruals and Matching Concept

Cash accounting records a cost when you pay it. That can mislead. If you use electricity in December but pay in January, cash accounting shows no cost in December, so profit looks too high.

The accruals concept fixes this. Income is recognised when earned and expenses when incurred, whatever the timing of cash. The matching idea follows: costs are placed in the same period as the income they helped to earn, so profit for the period is fair.

An accrued expense is a cost that belongs to the period but is unpaid at the reporting date. You add it to the expense for the year. You also create a liability, because you owe the money. It sits in current liabilities, usually under 'other payables' or 'accruals'.

The effect is simple. The expense in profit or loss is the cost of the period used, not the cash paid. The statement of financial position shows the unpaid part as a liability. Next year, the payment settles that liability, and the opening accrual is reversed so the expense is not counted twice.

Key formulas to remember

Expense for the year: Expense = Cash paid in year + closing accrual − opening accrual; Use this when opening accrual exists. The opening accrual relates to last year, so remove it.
Accrual journal at year end: Dr Expense account; Cr Accruals (current liability); For the amount incurred but unpaid at the reporting date.
Accrual from a period of usage: Accrual = Amount per period × unpaid periods used; For example, monthly rent of $500 × 3 unpaid months = $1,500.
Opening accrual in the new year: Dr Accruals; Cr Expense account; Reverses last year's accrual at the start of the new year. Cash paid is then debited to the expense.

How to solve Accruals and Matching Concept questions

Use this method for any accrual question, whether it is a journal, a ledger account or a figure for the statements.

1Identify the period covered by the financial statements and the reporting date.
2Find how much of the cost relates to that period, based on usage or time, not payment.
3Subtract what has already been paid for that period. The remainder is the accrual.
4Write the journal: debit the expense, credit accruals.
5If a ledger account is asked for, enter opening accrual (credit side, brought down), cash paid (debit), closing accrual (debit, carried down), and the balancing figure is the profit or loss charge.
6Put the expense charge in profit or loss and the accrual in current liabilities.
7Check the answer: expense = paid + closing accrual − opening accrual.

Quickest way: Expense account balancing in four lines

When to use it: Use when the question gives cash paid, opening accrual and closing accrual and asks for the profit or loss charge.

Start with cash paid.
Add the closing accrual.
Subtract the opening accrual.
The result is the charge to profit or loss. The closing accrual is the liability.

Common mistakes in Accruals and Matching Concept

Charging the cash paid as the expense without adjusting.
Students are used to thinking of expenses as payments.
Fix: Always ask what period the cost covers. Adjust cash paid for opening and closing accruals.
Subtracting the closing accrual instead of adding it.
Students confuse accruals with prepayments, which are subtracted.
Fix: An accrual means more cost than paid, so add it. A prepayment means less cost than paid, so subtract it.
Forgetting to deduct the opening accrual.
The opening balance is easy to overlook in the wording.
Fix: The opening accrual was charged last year. Remove it from this year's expense.
Showing an accrual as a current asset or as a reduction of cash.
Students mix up the side of the double entry.
Fix: An accrual is an amount owed, so it is a credit balance and a current liability.
Accruing a full year's cost when only part is unpaid.
Students ignore payments already made in the year.
Fix: Accrue only the unpaid portion of the cost used up to the reporting date.

Worked examples

Example 1

A business has a year end of 31 December. It pays rent of $1,000 per month, paid in arrears. In the year it paid 11 months' rent in cash, $11,000. There was no opening accrual. What is the rent expense and the closing accrual?

Show the solution

Rent for the year covers 12 months: 12 × $1,000 = $12,000.
Cash paid is $11,000.
Accrual = $12,000 − $11,000 = $1,000.
Journal: Dr Rent expense $1,000; Cr Accruals $1,000.
Check: $11,000 paid + $1,000 closing accrual − $0 opening accrual = $12,000.

Answer: Rent expense is $12,000 and the closing accrual of $1,000 is a current liability.

Example 2

At 1 January an electricity accrual of $400 was brought forward. During the year, electricity payments totalled $3,100. At 31 December, a bill for $500 for electricity used has not been paid. Find the charge to profit or loss.

Show the solution

Opening accrual: $400 credit. It was charged last year, so it is deducted.
Cash paid in the year: $3,100.
Closing accrual: $500, added.
Charge = $3,100 + $500 − $400 = $3,200.
Ledger check: debit side is cash $3,100 plus closing accrual $500 = $3,600. Credit side is opening accrual $400 plus the charge. The balancing charge is $3,600 − $400 = $3,200.

Answer: Profit or loss charge is $3,200. Accruals of $500 appear in current liabilities.

Exam tips

In objective tests, read whether the question asks for the expense or the liability. Both come from the same working but are different numbers.
For number entry questions, show the working on your scratch paper using paid + closing − opening so you do not mix signs.
For multiple response items, test each statement against the rule: accruals are liabilities, they increase expenses and reduce profit.
Look for wording such as 'in arrears', 'unpaid at year end' and 'brought forward'. These tell you an accrual is involved.
Check the effect on profit: an unrecorded accrual means profit is overstated and liabilities are understated.

Practice questions from Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Accruals and Matching Concept: frequently asked questions

What is the accruals concept in accounting?

It means income and expenses are recorded when they are earned or incurred, not when cash is received or paid. This gives a fairer measure of profit for the period. It is one of the main principles behind financial statements.

What is the accounting entry for an accrued expense?

Debit the relevant expense account and credit accruals. The credit is a current liability in the statement of financial position. The expense increases, so profit falls.

How do you calculate accrued expenses?

Work out the total cost for the period used, then subtract what you have paid for that period. The remainder is the accrual. For example, a $12,000 annual cost with $11,000 paid gives an accrual of $1,000.

What is the difference between an accrual and a prepayment?

An accrual is a cost incurred but not yet paid, so it is a liability. A prepayment is a cost paid in advance for a future period, so it is a current asset. Accruals increase the expense, while prepayments reduce it.