Academy/Financial Statements for Non-Accountants
Accrued expenses
A cost the association already owes, before any bill says so.
An accrued expense is a cost the association has already incurred but has not yet been billed or paid for. It's recorded through a journal entry, with a matching liability, before the invoice arrives, so the expense lands in the period it actually happened, not the period the bill shows up.
What makes an expense "accrued"
Most costs are easy: a vendor sends an invoice, the association pays it, done. An accrued expense is different. The work or usage already happened, but nothing has arrived to document it yet, no invoice, no receipt, nothing to hand the bookkeeper.
"An accrued expense is an expense that has been incurred, but for which there is not yet any expenditure documentation."
Source: Accrued expenses definition, AccountingTools
The bookkeeper records it anyway, with an offsetting liability, so the expense lines up with the period it belongs to rather than the period the paperwork happens to show up in.
How it's different from accounts payable and prepaid expenses
These three terms get mixed up constantly, and the difference is really just timing and paperwork.
| Term | Documentation exists? | Which side of the ledger |
|---|---|---|
| Accrued expense | No invoice yet | Liability, recorded by journal entry |
| Accounts payable | Invoice received | Liability, recorded from the bill |
| Prepaid expense | Already paid in full | Asset, used up over time |
Whether an accrued expense ever appears on your board's monthly package at all depends on whether your association's statements are prepared on a cash basis or an accrual basis. Only accrual accounting records accrued expenses; cash-basis statements wait for the check to clear. Ask your treasurer or management company which one your package uses.
A board example: the December utility bill
The pool pump and hallway lights ran all December. The electric company won't invoice that usage until mid-January. If the association's December financial statements are prepared on an accrual basis, the bookkeeper still records December's electricity as an expense in December, with a matching liability, even though no bill exists yet. When the January invoice finally arrives, it settles that liability rather than creating a brand-new expense.
Skipping that entry doesn't make the cost disappear, it just moves it into January's numbers, which makes December look artificially cheap and January look artificially expensive.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The association's December electricity usage won't be invoiced until January 15. On accrual-basis statements, how should December's books treat it?
The board paid the year's insurance premium in one lump sum last January. What is that payment called on the books?
The bookkeeper accrues an expense for December landscaping work that was completed but not yet invoiced. Where does the matching entry land?
Sources
- Accrued expenses definition, AccountingTools
- Prepaid expense definition, AccountingTools
- The difference between accounts receivable and accounts payable, AccountingTools
- The balance sheet, AccountingTools
Financial Statements for Non-Accountants
Next, see what those liabilities look like once they're grouped together: read Fund balances.
Whether your association's board-facing statements use cash or accrual accounting, and therefore whether accrued expenses appear on them at all, is a choice made by your association and its CPA, not a fixed rule. Confirm which basis your monthly package uses.