What are examples of accrued expenses?
- General goods and services received but not paid for
- Construction services
- Bonuses and wages to employees
- Warranties given to customers
Why are accrued expenses important?
- A better reflection of business reality: This ties into the overall purpose of accrual accounting. Accrued expenses give a more accurate reflection of a company's business reality than cash-based accounting since it shows in which period a business event has occurred (in this case the delivery of a good or service) rather than when cash has exchanged hands.
- Helps to estimate future cash flow and capital needs: Accrued expense gives a better overview of a company's future outflow of cash and can there help estimate a company's future financing needs.