Month-end accruals are the adjusting journal entries that pull revenue you’ve earned and expenses you’ve incurred into the current period, even when the cash hasn’t moved yet. They exist because business activity almost never lines up with payment dates. If your team works the last ten days of March but payday falls in April, the wages belong in March. Without the accrual, March understates expenses and April overstates them, and neither month’s income statement tells the truth.
Why Accruals Exist
Two ideas drive every accrual you’ll ever book. The first is the matching principle: expenses should land in the same period as the revenue they helped produce. If your sales team closes deals in June, the commissions belong in June, not July when the checks clear. Record them later and June looks more profitable than it was.
The second is revenue recognition under FASB’s ASC 606. The core rule is that you recognize revenue when you satisfy a performance obligation by transferring the promised good or service, in the amount you expect to collect.1Financial Accounting Standards Board. Accounting Standards Update 2014-09 Revenue from Contracts with Customers The practical version: revenue is tied to doing the work, not to sending the invoice. A consulting firm that finishes a $30,000 engagement in February records the revenue in February, even if the invoice goes out in March and the check arrives in April.
Accruals vs. Deferrals
These are mirror images, and confusing them is one of the most common month-end mistakes. An accrual records something that has happened economically but hasn’t been paid. A deferral records cash that already moved before the economic event has fully occurred.
- Accrued expense: your team used electricity all month, but the utility bill won’t arrive until next month. You record the estimated cost now.
- Deferred (prepaid) expense: you paid six months of insurance upfront. Only one month is expense right now; the rest sits on the balance sheet as a prepaid asset.
- Accrued revenue: you finished a project milestone but haven’t invoiced yet. You record the earned revenue now.
- Deferred (unearned) revenue: a customer paid you a year in advance. The cash is yours, but the earnings sit as a liability until you deliver each month.
Accruals pull economic activity into the current period before cash moves. Deferrals push already-received cash into future periods until the work is done. The accrual side usually requires more estimation because you’re recording amounts before the paperwork arrives.
Accrued Expenses You’ll See Every Month
Accrued expenses are costs the business has already consumed but hasn’t paid for or received a bill for by month-end. They sit as current liabilities on the balance sheet. Three categories dominate.
Payroll and Related Taxes
If the pay period doesn’t align with the calendar month, wages hang in limbo at month-end. Say the month ends on a Wednesday and payday is the following Friday. Those last days of wages, plus the employer’s share of Social Security, Medicare, and unemployment tax, have to be estimated and recorded. The expense was incurred the moment employees clocked in.
The IRS has long recognized that payroll taxes on wages earned in one period but paid in the next are deductible in the period the wages were earned, provided the accrual method is followed consistently.
Interest on Debt
Interest accrues daily even when payments happen monthly, quarterly, or semi-annually. The math is straightforward: annual rate divided by 365, times the outstanding principal, times days since the last payment. A $500,000 loan at 6% accrues roughly $82 a day. Twenty days after the last interest payment, you’d book about $1,644 in accrued interest.
Utilities and Services
Utility bills almost never arrive before the close. Electricity, water, gas, internet, and waste disposal invoices typically lag two to three weeks. Estimate from the prior month’s bill or historical consumption and true up when the actual invoice comes in. If your estimates land close to actuals, auditors won’t push back. If they’re routinely off by double-digit percentages, the estimation method needs work.
Accrued Revenue and Unbilled Receivables
Accrued revenue is the flip side: income you’ve earned through completed work but haven’t yet billed. On the balance sheet it sits as a receivable, representing a right to collect in the future.
Project-based work is the classic case. A construction firm that’s 60% through a contract at month-end accrues 60% of the contract value as revenue, even if the billing milestones haven’t triggered. Interest income on bonds accrues daily regardless of coupon dates. A services business with billable hours completed but not invoiced faces the same situation.
Unbilled Revenue Is Not the Same as Accounts Receivable
Once you send an invoice, the amount moves to accounts receivable, a formal claim supported by documentation. Before the invoice, the earned amount sits in an unbilled receivable or contract asset account. Both are assets, but they carry different collection risk and often need separate disclosure. Long-term contracts, subscription services, and any billing cycle that doesn’t match revenue recognition will produce unbilled receivables every month. Treating them as interchangeable with invoiced receivables distorts aging reports and cash flow projections.
Recording the Entries
The mechanics are consistent regardless of the type. Every accrual creates a pair: one side hits the income statement, the other hits the balance sheet.
For an accrued expense, debit the expense account (increasing cost on the income statement) and credit an accrued liability (increasing obligations on the balance sheet). Accruing $12,000 in wages: debit Wage Expense $12,000, credit Accrued Wages Payable $12,000.
For accrued revenue, the direction reverses. Debit a receivable (increasing assets) and credit revenue (increasing income). The $30,000 consulting engagement: debit Unbilled Receivables $30,000, credit Consulting Revenue $30,000.
Reversing Entries
Most accruals get reversed on the first day of the next period. The reversal is the exact mirror of the original. If you debited Wage Expense and credited Accrued Wages Payable, the reversal debits Accrued Wages Payable and credits Wage Expense. This temporarily puts a negative balance in the expense account, which corrects itself when the actual payroll runs later in the new period.
Reversals exist to make routine processing easy. Without them, the bookkeeper would have to manually split the payroll entry between the accrued liability and the current period’s expense. With the reversal in place, they record the full payroll as usual and the math works out. That prevents double-counting and means nobody processing payments has to remember last month’s accruals.
Where Accruals Fit in the Close
Accruals are one step in a broader month-end close that typically runs five to seven business days for well-organized teams and closer to ten for mid-sized companies still working manually. A practical sequence:
- Before month-end: remind department heads to submit pending expenses, timesheets, and purchase orders. The accruals you have to estimate shrink dramatically when documentation arrives on time.
- Days 1–2 after close: record every transaction that can be posted with actual data. Run bank reconciliations and clear intercompany balances.
- Days 3–4: identify remaining gaps and post accrual entries. Estimate payroll, utilities, unbilled revenue, and anything else lacking final documentation. Pull supporting schedules from prior months, contracts, and purchase orders to build the estimates.
- Days 5–7: review accruals against prior months for reasonableness, reconcile the balance sheet, and run the trial balance. Any accrual that moved significantly from the prior month should have a documented explanation.
When You Can Skip an Accrual
Not every unpaid expense needs one. If the office water cooler service is $45 a month and the invoice arrives a week late, nobody is restating financials over it. Materiality gives you permission to ignore trivial amounts.
There’s no universal bright-line rule. Some practitioners use a rough 5% benchmark as a starting point, but it isn’t codified in GAAP and shouldn’t be treated as a safe harbor. Materiality depends on size and nature relative to your financial statements. A $5,000 omission is immaterial for a company with $10 million in revenue but significant for a business generating $80,000 a quarter.
Auditors typically set overall materiality as a percentage of profit before tax, often 3% to 10% depending on size, industry, and public-company status. They then set a lower “performance materiality” to catch the risk that several small errors add up. The practical lesson: write down your policy, define the threshold for accruals, and apply it consistently. Auditors rarely question a skipped accrual that falls below a documented threshold. They will question inconsistency.
Tax Treatment Doesn’t Automatically Follow GAAP
Booking an accrual under GAAP does not automatically make it a tax deduction. For federal income tax purposes, accrual-method taxpayers have to meet the “all-events test” under Section 461 of the Internal Revenue Code. Three conditions must be satisfied: the events establishing the liability have occurred, the amount can be determined with reasonable accuracy, and “economic performance” has taken place.2Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction
Economic performance is the sticking point. If the liability involves someone providing services to you, economic performance happens as they do the work. For property, it happens on delivery. For tort and workers’ compensation liabilities, economic performance doesn’t occur until you actually pay, which means you can’t deduct those liabilities just because you accrued them under GAAP.
The Recurring Item Exception
There’s a valuable exception for routine accruals. If an expense is recurring, treated consistently year to year, the all-events test is met by year-end, and economic performance occurs within 8½ months after the close of the tax year, you can deduct in the earlier year. The item also has to be either immaterial or produce a better match against income than waiting for economic performance.3eCFR. 26 CFR 1.461-5 – Recurring Item Exception The exception covers a lot of standard month-end accruals: utilities, recurring service fees, and similar obligations where payment follows shortly after year-end.
What Bad Accruals Cost You
Sloppy accruals are not just an accounting problem. They cascade into financial and legal consequences, especially for companies with outside investors or bank debt.
Loan Covenant Violations
Many bank loans include financial covenants tied to ratios like debt-to-equity or interest coverage. If missing or understated accruals cause reported financials to breach a covenant, the lender can reclassify your long-term debt as a current liability, meaning it’s technically due on demand. That happens even if the bank hasn’t demanded repayment and has no intention of doing so. The shift from long-term to current can then trigger additional covenant violations on other agreements and create the appearance of a liquidity crisis on the balance sheet.
SEC Enforcement
For publicly traded companies, the stakes escalate. The SEC has pursued enforcement against companies that shifted expenses between periods to manipulate reported earnings. In one case, a company that failed to properly accrue rebate program costs in the correct periods, instead deferring tens of millions of dollars of expense into later fiscal years, paid an $80 million penalty.4Securities and Exchange Commission. Monsanto Paying $80 Million Penalty for Accounting Violations Three individual executives paid personal fines, two accountants were barred from practicing before the SEC, and under Sarbanes-Oxley’s clawback provisions the CEO and former CFO reimbursed the company nearly $3.9 million in bonuses and stock awards they’d received during the misstated periods.
Restatements and Due Diligence
Even for private companies, material accrual errors discovered during an audit can force restatement of prior-period financials. Beyond the audit cost, restatements damage credibility with lenders, investors, and potential acquirers. In a sale or capital raise, the buyer’s due diligence team scrutinizes accrual practices as a proxy for the overall reliability of financial reporting. A history of large true-ups and post-close adjustments is a red flag that can reduce valuation or kill a deal.
The pattern in most of these cases is the same. Someone decided to push an expense into the next period because the number was inconvenient. The mechanics of an accrual are simple. The discipline to record unfavorable numbers on time is where companies fail.