What does accruing an expense entail?

Accruing an expense involves recognizing an expense when it is incurred, regardless of whether cash has been paid out. This accounting approach aligns with the accrual basis of accounting, which states that expenses should be matched with the revenues they help to generate. When an expense is accrued, it is recorded in the financial records in the period it occurs, thereby providing a more accurate picture of an organization’s financial health.

For example, if services are received in December but payment is not made until January, the expense would still be recorded in December. This ensures that the financial statements reflect all incurred liabilities, giving stakeholders a clearer view of financial obligations during the reporting period.

The other choices refer to different methods of expense recognition. Recognizing an expense when cash is paid pertains to cash basis accounting rather than accrual accounting. Recording an estimated expense at year-end is a different process and doesn’t fully capture the essence of accruing expenses. Finally, documenting expenses only when they are completed implies a cash basis approach, where expenses are acknowledged only upon completion rather than at the point of incurrence.