Accrued expense
AccountingA cost already incurred but not yet paid or invoiced, recorded as an expense now and as a liability until the cash goes out.
Also written: accrued expenses, accrued liabilities, accruals
Accrual accounting records a cost when the economic activity happens, not when the money moves. Staff who worked in December earned their bonus in December, so the expense belongs to December even if the payment lands in March. The unpaid amount sits on the balance sheet as an accrued liability in the meantime.
In the period it arises, an accrued expense behaves exactly like a non cash charge. Profit falls by the full amount, no cash goes out, and the tax saving is the only real cash movement, so cash actually rises. That equivalence surprises people and it is precisely why interviewers use the accrual variant of the walkthrough question.
The two separate in the following period. Depreciation relates to cash that left the business when the asset was bought, so it never causes an outflow again. An accrual relates to cash that has not left yet, so settlement produces an outflow with no income statement effect at all, since the cost was already recognised.
That timing is why the accruals line is worth watching in diligence. A large increase flatters cash from operations in the year it happens and reverses in the next, so a business whose cash generation improved mainly through a swelling accruals balance has borrowed the improvement from next year rather than earned it.
Worked example
A bonus of 100 accrued in December at a 25% tax rate. Profit falls 75, accrued liabilities rise 100, and cash rises 25 because the tax bill fell.
In March the bonus is paid. There is no income statement effect, accrued liabilities fall 100 and cash falls 100. Across the two periods the cost was 100 and the cash was 100, recognised in one period and paid in the other.