What is accrued expense?

• A. Expense paid in advance
• B. Expense recorded when cash is paid
• C. Expense incurred but not yet paid; recognized with an adjusting entry
• D. Expense reduces cash immediately

Answer: (C)

Accrued expense means an expense has been incurred in the current period but has not yet been paid. Under accrual accounting, expenses are recognized when they are incurred, not when cash is paid. To reflect this at the end of the period, you record an adjusting entry that increases an expense and creates a corresponding liability.

For example, if employees have earned wages by period end but won’t be paid until the next period, you would debit the wage expense and credit Wages Payable. This shows the company has used resources and owes money, even though cash hasn’t left yet. When the payment is made later, you would debit Wages Payable and credit Cash to settle the obligation.

This concept differs from paying in advance, which is a prepaid expense, because that timing reflects cash paid before the service or good is used. It also isn’t just recording an expense when cash is paid, which would be cash-basis. And it isn’t about an expense reducing cash immediately; accruals separate the recognition of the expense from the actual cash outflow.