Accrued fees are costs your business has already incurred but not yet been invoiced for, and you record them at period-end with an adjusting journal entry that debits an expense account and credits a liability account. This keeps expenses in the same period as the revenue they helped produce. Skip the entry and your profit looks bigger than it really is.
What Counts as an Accrued Fee
An accrued fee exists whenever your company has consumed a service or benefited from an obligation before the vendor’s invoice arrives. Interest on a loan is the classic case: it builds up daily even though payment is due quarterly. Utilities used through the last day of the month but billed in the following month behave the same way. So do legal fees when outside counsel has been working on a matter but hasn’t sent a timesheet by your reporting date.
The reason to book these expenses before the paperwork catches up is the matching principle, which requires expenses to sit in the same period as the revenue they supported. If your company earns $500,000 in December but ignores $50,000 in unbilled professional fees, December’s income statement overstates profit by $50,000. That distortion compounds and misleads anyone using the numbers.
Matching sits at the core of accrual basis accounting, which most mid-size and large businesses are required to use. Under the Internal Revenue Code, C corporations and partnerships with a C corporation partner must use the accrual method unless they meet the gross receipts test. For taxable years beginning in 2026, that test is met only if average annual gross receipts over the prior three years do not exceed $32 million.1Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting Businesses below that threshold can generally choose either method. Tax shelters must use accrual regardless of size.
How to Record the Journal Entry
At the close of each accounting period, you record accrued fees through a two-sided adjusting entry. The debit hits a specific expense account on the income statement, such as Interest Expense or Legal Fee Expense, which raises total expenses for the period. The credit goes to a liability account on the balance sheet, usually called Accrued Expenses or Accrued Liabilities.
That liability sits in the current liabilities section of the balance sheet, because the obligation will settle within one year or the current operating cycle, whichever is longer. Anyone reading the statements can then gauge short-term liquidity without hunting through long-term debt schedules.
A quick example. Your outside law firm worked 40 hours in December at $250 per hour, but the invoice won’t arrive until January. On December 31, you debit Legal Fee Expense for $10,000 and credit Accrued Expenses for $10,000. December’s income statement reflects the cost, and the balance sheet shows you owe it.
When an Accrual Is Worth Recording
Not every unbilled dollar needs its own entry. The practical question is whether the amount is material enough to change someone’s view of the business. The SEC has addressed this, noting that while a 5-percent-of-income rule of thumb is common as an initial screen, “exclusive reliance on this or any percentage or numerical threshold has no basis in the accounting literature or the law.”2U.S. Securities and Exchange Commission. Staff Accounting Bulletin No. 99 – Materiality Size and context both matter.
A $3,000 unbilled utility expense might be immaterial for a company with $20 million in revenue but highly material for a startup burning through its last $100,000. Qualitative factors matter too. If omitting the accrual turns a reported profit into what should be a loss, or masks a trend investors would want to see, it’s material regardless of dollar amount. The test is whether a reasonable person’s judgment would be “changed or influenced” by the omission.2U.S. Securities and Exchange Commission. Staff Accounting Bulletin No. 99 – Materiality
Most companies set a dollar threshold below which they skip individual accruals. Document it in your internal accounting policies and revisit it periodically. What’s immaterial at $5 million in revenue may not be immaterial at $50 million.
Accrued Fees vs. Accounts Payable
Both show up as current liabilities, and both represent money owed for something already received. The dividing line is paperwork. Accounts payable is created when a vendor invoice arrives with an exact amount. An accrued fee is created by your own adjusting entry because no invoice has arrived.
That distinction matters for how much certainty each number carries. A $10,000 accounts payable balance is backed by a document from the vendor. A $10,000 accrued fee is your best estimate based on contract terms, hours worked, historical patterns, or management judgment. Close, maybe, but still an estimate.
Track the two in separate general ledger accounts, even though they both sit under current liabilities. When the real invoice arrives for a previously accrued item, you can compare actual to estimate, investigate variances, and adjust. Combining them into one bucket makes double-counted items and missed reconciliations much harder to catch.
Closing Out the Accrual When the Invoice Arrives
Once the vendor sends the actual bill in the following period, the accrual needs to be cleaned up. Two approaches are common.
The Reversing Entry Method
On the first day of the new period, reverse the original accrual by debiting Accrued Expenses and crediting the expense account. This zeros out the prior-period adjustment. When the invoice arrives, record it normally: debit the expense account for the invoiced amount and credit Accounts Payable. When you pay, debit Accounts Payable and credit Cash.
The advantage is that accounts payable can process invoices through the standard workflow without checking whether an accrual already exists. The risk is that if the reversal doesn’t happen, the expense gets counted twice.
The Direct Settlement Method
Some organizations skip the reversal and debit Accrued Expenses directly when paying the invoice, with a credit to Cash. This is common in institutional accounting systems and avoids reclassifying the amount through Accounts Payable.
Either way, if the actual invoice differs from your estimate, the variance flows through as an expense adjustment in the current period. A $10,000 legal fee accrual that comes in at $10,200 means the current period absorbs the extra $200. The prior period’s closed financials stay intact.
Automating the Reversal
Modern accounting and ERP systems can handle reversals automatically. When you post an accrual entry flagged as auto-reversing, the system generates the reversal journal for the first day of the next period without manual intervention. These system-generated reversals typically can’t be edited, only posted or unposted, which prevents someone from accidentally altering the reversal amount.3Oracle Help Center. Creating Consolidation Auto-reversing Journals That’s where most of the double-counting risk gets eliminated in practice.
When You Can Actually Deduct an Accrued Expense
Recording an accrual on your books doesn’t automatically mean you can deduct it on your tax return that year. The IRS applies a separate test called economic performance. For services provided to your company, the all-events test isn’t met until the service has actually been performed.4Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction
This creates a timing distinction that catches a lot of businesses. You might accrue an expense in December because you expect work to be done, but if the vendor doesn’t perform until January, the deduction belongs in the following tax year. The book accrual stays in December for financial reporting; the tax deduction moves.
The Recurring Item Exception
There’s an important carve-out for routine expenses. If an accrued item is recurring, you consistently treat it the same way each year, and economic performance occurs within 8½ months after year-end, you can deduct it in the year you accrued it even though performance hadn’t occurred by December 31.4Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction The item must also either be immaterial or produce a better matching of income and expenses. Monthly utility bills and recurring maintenance contracts fit the pattern this exception was designed for.
The 2½-Month Rule for Bonuses
Employee bonuses have their own timing rule. If your company accrues bonuses at year-end, the deduction is available in that tax year only if the bonuses are actually paid within 2½ months after the close of the tax year. For calendar-year businesses, that deadline is March 15. The liability must also be legally fixed by December 31, meaning the board or authorized management has formally approved the bonus pool before year-end.
One trap catches closely held businesses. Bonuses paid to related parties, such as shareholders in an S corporation or majority shareholders in a C corporation, are automatically deferred to the year the employee receives cash. You can’t accelerate the deduction by accruing in December if the recipient is also an owner.
Accruing Payroll and Benefits
Wages and salaries are among the most common accruals and often the largest. If your pay period doesn’t align with the end of the reporting period, you’ll have earned wages that employees haven’t been paid for yet. A company that pays biweekly on Fridays and closes its books on a Wednesday needs to accrue three days of wages.
The calculation is straightforward in concept: daily pay rate times the number of unpaid days. It gets more complex because you also need to accrue the employer’s share of payroll taxes, retirement plan contributions, and benefits that build alongside wages. Vacation and sick leave earned but not yet used typically creates an accrued liability as well.
Compensation accruals tend to be large enough that skipping them would produce a material misstatement for almost any company. They’re also predictable and well-documented, which makes them easier to estimate accurately than an unbilled consulting engagement where final hours are still moving.