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Accrued expenses are goods and services a company has received but hasn’t paid for yet. Even though no cash has exchanged hands, a company will account for accrued expenses in the budget.

This type of accounting, called the accrual method, allows a company’s financial statements (such as the balance sheet and income statement) to be more accurate. However, it requires more journal entries than simple cash basis accounting.

Read on for an in-depth look at accrued expenses, including what they are, examples of accrued expenses, plus how accrual accounting compares to other accounting methods.

What Are Accrued Expenses?

By definition, accrued expenses are expenses a company accounts for when they happen, as opposed to when they are actually invoiced or paid for.

An example of an accrued expense is when a company purchases supplies from a vendor and has not yet received an invoice or paid for the purchase. Other examples include employee wages, commissions, and bonuses, also known as accrued compensation. These costs accrue in the period they occur even though the actual payment is made in the following period. Interest on a small business loan or taxes can also be considered accrued expenses.

Tracking accrued expenses is important because they represent a liability (money that must eventually be paid out) for your company and can significantly impact your cash flow and key financial statements.

Key Characteristics

Key characteristics of accrued expenses in a small business include:

•  Incurred but unpaid: These expenses have been incurred during a period but not yet paid.

•  No invoice received: Often recorded without a formal bill, based on estimates.

•  Recorded in the period incurred: Ensures accurate matching of expenses to revenue in financial statements.

•  Short-term liability: Typically settled within a short time, like payroll or interest.

•  Affects cash flow and profitability: Impacts both budgeting and financial planning.

Recommended: Guide to Single-Step and Multi-Step Income Statements

How Accrued Expenses Work

With an accrued expense, there is no documentation of the expenditure — at least not yet. In place of that documentation, a bookkeeper or owner will create a journal entry to record an accrued expense, as well as an offsetting liability. If no journal entry was made, the expense would not appear in any of the company’s financial statements for that period. This could result in reported profits being too high in that period.

Reporting accrued expenses helps increase the accuracy of financial statements, so that expenses are more closely aligned with the revenues they are associated with. In some cases, accrued expenses will be an estimated amount of what’s owed. This is then adjusted later to the exact amount once the invoice has been received.

Since accrued expenses represent a company’s obligation to make future cash payments, they are recorded on a business’s balance sheet as current liabilities.

Accounting Mechanism

The accounting mechanism behind accrued expenses follows the accrual basis of accounting, ensuring expenses are recognized when incurred, not when paid. Here’s how it works:

1.   Expense recognition: When a business incurs an expense (wages earned by employees or utilities used) but hasn’t yet paid for it, the accountant records it in the same accounting period.

2.   Journal entry: A journal entry is made to:

a.   Debit the appropriate expense account (salaries expense, interest expense).

b.   Credit an accrued liability account (accrued expenses payable).

3.   Balance sheet impact: This creates a liability on the balance sheet, showing the company owes money.

4.   Payment and adjustment: When the company eventually pays the expense, the liability account is debited (reduced), and “cash” or “bank” is credited.

This mechanism ensures accurate financial reporting, even when cash has not yet changed hands.

Recognition Principle

The recognition principle states that expenses should be recognized in the same period as the revenues they help generate, regardless of when the cash is actually paid. Here’s how it works:

•  Timing: An accrued expense is recorded when the obligation is incurred — not when the payment is made.

•  Purpose: This aligns expenses with the period in which they contribute to revenue, offering a more accurate picture of financial performance.

•  Example: If a company uses electricity in December but doesn’t receive the bill until January, the expense is still recognized in December.

In short, the recognition principle ensures that a business’s income statement reflects all expenses tied to the period’s activities, giving stakeholders a clearer view of profitability.

Recommended: 9 Accounting Basics Every Small Business Owner Should Know

Accrual vs Cash Basis Accounting

When managing a business’s finances, one of the most important decisions is choosing between accrual basis accounting and cash basis accounting. These two methods determine how and when income and expenses are recorded, directly affecting financial reporting, tax planning, and strategic decision-making.

While cash basis accounting records transactions when cash changes hands, accrual accounting captures them when they are earned or incurred — regardless of payment timing. Understanding the differences is essential for accurate financial insight and regulatory compliance.

Fundamental Differences

There are some key differences between cash vs. accrual accounting.

As stated above, cash basis accounting records money and expenses when money is actually received or paid. Accrual accounting, by contrast, records revenues and expenses when they are earned, regardless of when the money is actually received or paid. The actual money may be sent or received during a different reporting period.

Accrual basis of accounting is in accordance with the Generally Accepted Accounting Principles (GAAP), whereas cash basis accounting is not.

Here’s a side-by-side comparison of cash basis accounting vs accrual accounting.

Accrued Expenses Examples

Some examples of the accrued expenses that your company might need to track include:

•  Employee wages

•  Services received

•  Interest on small business loans

•  Taxes

•  Utility bills

•  Computer equipment

•  Office supplies

Let’s take a closer look at office supplies to get a more detailed example of an accrued expense.

Let’s say your company receives office supplies from a supplier on June 25th. The invoice (expected to be $600), however, doesn’t come in before you close the company’s books for June. To record this accrued expense in the month you received it, you would record a debit of $600 to the office supplies expense account and a credit of $600 to the accrued expenses liability account.

When you later receive the supplier invoice for $600, you would record it through the accounts payable module of your small business accounting software. This results in a debit to the office supplies expense account and a credit to the accounts payable account. As a result, there is no new expense recognition the following month.

Recommended: Understanding Budgeted Income Statements

Prepaid vs Accrued Expenses

Prepaid expenses are the opposite of accrued expenses. With accrued expenses, the company has received goods and services but has not yet paid for them. With prepaid expenses, the company pays for goods and services it has not yet received but expects to receive or use in the future.

While accrued expenses represent liabilities, prepaid expenses are recognized as assets on the balance sheet. That’s because the company expects to receive future economic benefit from the prepayment.

Here’s a closer look at prepaid expenses vs. accrued expenses.

Recommended: Guide to the Working Capital Cycle

Accrued Expenses on a Balance Sheet

Accrued expenses are recorded on a company’s balance sheet, which shows what a company owns (its assets) and owes (its liabilities) as of a particular date, along with its owners’ equity.

Accrued expenses are recorded under current liabilities, which are a company’s financial obligations that are due within one year or within a normal operating cycle.

Recording Accrued Expenses

With accrued expenses, you typically accrue a liability in one period and pay the expense in the next period. That means you enter the liability in your books at the end of an accounting period. Then in the next period, you reverse the accrued liabilities journal entry when you pay the debt. This shows the expense paid instead of a debt owed.

Keep in mind that you only deal with accrued liabilities if you use accrual accounting. Under the accrual method, you record expenses as you incur them, not when you exchange cash. With cash basis accounting, on the other hand, you only record transactions when cash changes hands.

Impact on Financial Statements

Accrued expenses impact a company’s financial statements by increasing liabilities and reducing net income during the period they are recorded. Here’s how they show up:

•  Income statement: Accrued expenses are recorded as an operating expense, lowering net income even though the cash hasn’t been paid yet.

•  Balance sheet: They appear under current liabilities, representing obligations the company must settle in the near future.

•  Cash flow statement: They do not immediately affect the cash flow until the cash is actually paid.

This approach ensures that the company’s financials reflect a more accurate picture of its financial obligations and performance during the reporting period.

Best Practices for Reporting

In order to ensure best practices for reporting accrued expenses, follow these guidelines:

•  Be consistent: Apply the same methods across reporting periods to maintain comparability.

•  Be as accurate as possible: Use reliable data and historical trends to estimate expenses when exact amounts aren’t available.

•  Record in a timely manner: Record accrued expenses in the correct accounting period to align with the matching principle.

•  Be detailed: Maintain detailed records supporting the accrual, including contracts, invoices, or calculation notes.

•  Regularly review and adjust as needed: Regularly review accrued liabilities to adjust or reverse them as needed when actual amounts are known.

Recommended: Guide to Financial Projections

The Takeaway

An accrued expense is an expense that is recorded before it has been paid. Listed under current liabilities on a company’s balance sheet, accrued expenses are recorded when they are incurred, even if the expense is actually paid in a different quarter.

If your small business has a lot of expenses, you may want to use accrual accounting vs. cash accounting, since it can help you keep better track of your total liabilities. Though it requires more work to do accrual accounting, recording accrued expenses generally makes financial statements more accurate.

GAAP prefers the accrual accounting method and, if you apply for any type of small business loan, the lender may ask for financial statements generated on an accrual basis.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How are accrued expenses recorded?

Companies record accrued expenses when they are incurred, not when they are paid. They appear on a company’s balance sheet as current liabilities.

What are some common accrued expenses?

Common accrued expenses include:

•  Goods or services you’ve purchased but haven’t received an invoice for yet

•  Bonuses, salaries, or wages payable

•  Utility expenses that won’t be billed until the following month

•  Unpaid interest expenses

Is rent an accrued expense?

Rent is typically a prepaid expense since you pay it in advance of receiving the benefit of the payment. If a company occupies a rented space but has not yet paid the rent due for that period, however, it would be an accrued expense.

How do accrued expenses affect a company’s financial health?

Accrued expenses impact a company’s financial health by increasing liabilities, which can reduce net income and affect short-term liquidity. While they reflect accurate accounting of incurred costs, excessive accruals may signal cash flow challenges, potentially raising concerns about the company’s ability to meet financial obligations.

What is the difference between accrued and accounts payable expenses?

Accrued expenses are costs a company has incurred but hasn’t yet been billed for, like wages or utilities. Accounts payable, on the other hand, are bills the company has received and agreed to pay. Both are liabilities, but accrued expenses are estimated, while accounts payable are based on actual invoices.

Photo credit: iStock/Anchiy

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q225-007

There are several different types of small business loans backed by the U.S. Small Business Administration (SBA). The most popular option is the 7(a) loan, which provides financing with favorable rates and terms up to 25 years to businesses that have had trouble getting funding elsewhere. You can use the proceeds to cover a wide range of business expenses, including working capital, operating costs, real estate, and equipment.

Read on for a closer look at how the SBA 7(a) loan works and how to qualify.

What Is an SBA 7(a) Loan?

An SBA 7(a) loan is a small business loan that is offered through private lenders but partially guaranteed by the SBA. The 7(a) is generally the best SBA loan option if you are looking to purchase real estate. However, this loan can also be used for:

•  Short- and long-term working capital

•  Refinancing a business loan you already have

•  Purchasing furniture, fixtures, or supplies

The maximum loan amount for a 7(a) loan is $5 million.

You’ll find several types of loans and lines of credit in the 7(a) program. Each of them is designed to meet different needs. Some target specific industries, some are for the smallest of small businesses, and others focus on a quick turnaround time.

Program Origins

The SBA 7(a) loan program originated with the Small Business Act of 1953, which established the U.S. Small Business Administration (SBA) to support and protect small businesses.

The 7(a) program was designed as the SBA’s flagship loan offering, helping entrepreneurs access financing when traditional lenders might consider them too risky. Over time, the program has evolved to offer flexible funding options for various business needs, including working capital, equipment purchases, and real estate, with the SBA guaranteeing a portion of the loan to reduce lender risk.

Government Backing

The SBA 7(a) loan program is partially backed by the U.S. government through the Small Business Administration. This guarantee means that if a borrower defaults on the loan, the SBA will reimburse the lender for a portion of the outstanding balance — typically up to 85% for loans up to $150,000 and up to 75% for larger loans. This government backing reduces the risk for lenders, encouraging them to offer financing to small businesses that might not qualify through traditional means.

Recommended: Guide to Microloans and Their Uses

How an SBA 7(a) Loan Works

Although 7(a) loans are backed by the government, the SBA does not actually make any direct loans. Instead, you apply for these small business loans through a regular lender that is approved to distribute SBA loans. At a minimum, the lender must require that you meet the SBA’s requirements, but it may also add some of its own criteria, such as requiring the owner to have a certain minimum credit score.

Each type of 7(a) loan comes with a maximum loan amount (or line of credit limit), along with a set repayment term. Typically, you’ll have longer to repay the loan if you’re approved to purchase commercial real estate with your loan funds. Additionally, the larger the loan amount, the longer you typically have to pay back the loan.

Loan Mechanics

An SBA 7(a) loan works through a partnership between the borrower, a participating lender (typically a bank or credit union), and the U.S. Small Business Administration.

Borrowers apply through approved lenders and can use funds for working capital, equipment, or real estate. Loan terms vary, with repayment periods up to 25 years.

Lender Relationships

You can expedite the loan approval process by working with an SBA Preferred Lender. They have a positive track record with SBA loans, giving them more authority to process SBA financing.

Recommended: What Is the Minimum Credit Score for a Business Loan?

Eligibility for an SBA 7(a) Loan

Here are the minimum eligibility requirements for an SBA 7(a) loan. Remember, though, that individual lenders may also have additional small business loan requirements of their own.

Business Qualification Criteria

To be eligible, potential borrowers must:

•  Be a for-profit business

•  Meet the SBA’s size requirements

•  Do business in the U.S.

•  Have equity invested in the business

•  Use other resources (including personal assets) before turning to SBA 7(a) loans

•  Have a need for the loan funds and use the money for sound business purposes

•  Have no outstanding or delinquent debts to the U.S. government

There are also some types of businesses that the SBA will not approve, including real estate investment firms, pyramid sales plans, businesses that involve gambling activities, and non-profit organizations.

Documentation Requirements

The documentation requirements for when you apply for an SBA loan typically include the following:

•  Personal and business credit reports: Lenders will assess the borrower’s creditworthiness and the business’s financial stability.

•  Personal and business tax returns: Typically for the past three years to review the borrower’s and business’s financial performance.

•  Profit and loss statement: A recent profit and loss statement helps to show current business financial health.

•  Balance sheet: A detailed balance sheet to show the financial position of the business.

•  Business plan: A detailed business plan outlining how the loan will be used and how the business plans to repay it.

•  Collateral documentation: Information on assets used to secure the loan, such as real estate or equipment.

•  Legal documents: Articles of incorporation, operating agreements, leases, and other legal documents relating to the business structure and operations.

•  Loan application: The completed SBA loan application form, which includes personal and business information.

These documents help lenders assess the borrower’s ability to repay the loan and the overall risk involved.

Recommended: 15 Types of Business Loans to Consider

How to Get an SBA 7(a) Loan

Getting an SBA 7(a) loan can be an excellent way for small businesses to secure financing with favorable terms, but the process requires an understanding of the application process and careful preparation.

Application Step-by-Step

The step-by-step process of applying for an SBA loan is as follows:

1.   Determine loan type: The first step is to decide which SBA 7(a) loan is right for your business. Common types include the Standard 7(a) loan, the 7(a) Small loan, and the SBA Express loan. Each has its specific purposes, so understanding the terms and requirements is essential before proceeding.

2.   Check eligibility: Review the SBA’s eligibility criteria to ensure you meet the necessary requirements. These include U.S. citizenship, a for-profit business, a strong credit history, and the ability to repay the loan. The SBA may also look at factors like industry type and whether the business has other outstanding loans.

3.   Prepare documentation: Gather all the required documents. Typical documentation includes personal and business tax returns, financial statements (e.g., balance sheets, income statements), personal financial statement, business plan, resumes of key business owners and managers, and collateral (if applicable).

4.   Choose an SBA-approved lender: You must apply through an SBA-approved lender, such as a bank or credit union. Research different lenders, comparing their loan offerings, interest rates, and processing fees. Many lenders now offer SBA loan applications online, streamlining the process.

5.   Submit the application: Once you’ve chosen a lender, complete the application. Most SBA lenders have online portals where you can fill out and submit your application. Ensure that all information is accurate and complete to avoid delays.

6.   Wait for review and approval: The lender will review your application, financial documents, and business plan. They may request additional information or clarifications. The SBA guarantees a portion of the loan, but the lender decides whether to approve it. The approval process typically takes several weeks.

7.   Negotiate loan terms: If your loan is approved, you will receive an offer detailing the loan amount, interest rate, repayment terms, and fees. Carefully review these terms and negotiate if necessary to ensure they align with your business’s needs and cash flow.

8.   Sign the loan agreement: After finalizing the loan terms, sign the agreement. This is when the formal loan contract is established, and funds will begin to be disbursed according to the agreed-upon terms.

Preparation Strategies

Before applying for an SBA loan, it’s crucial to be well-prepared. Start by ensuring your business’s finances are in order, including having up-to-date financial statements and a clear cash flow projection. Having a solid business plan is key, as it demonstrates to lenders that you have a clear vision for success. It’s also beneficial to maintain a good personal and business credit score, as these will be significant factors in the approval process.

Additionally, gathering references, understanding your industry’s market, and reviewing potential SBA loan options ahead of time will help you make the best choice for your business’s financial needs.

Recommended: Small Business Tax Tips

Types of SBA 7(a) Loans

There are several types of financing options available through the SBA 7(a) loan program.

Standard 7(a)

The Standard 7(a) Loan program lets businesses borrow up to $5 million. These loans can be used for a variety of purposes, including working capital, business expansions, or purchasing equipment and supplies.

The SBA guarantees up to 75% of the loans. Lenders are required to obtain collateral from borrowers on loans greater than $50,000. Collateral can be in the form of the business’s fixed assets, trading assets, or the principal’s personal real estate equity. You can get a funding decision for your 7(a) small business loan application from the SBA in five to 10 business days.

Recommended: EBITDA vs. Net Income

7(a) Small Loan

A 7(a) Small loan offers financing up to $500,000. Similar to Standard 7(a) loans, collateral is required on loan amounts greater than $50,000. Small loans are guaranteed up to 85% by the Small Business Administration for loan amounts up to $150,000. The 7(a) Small loan follows the same general eligibility criteria as other 7(a) loans but typically offers a faster application and approval process due to the smaller loan amount.

Turnaround time for SBA 7(a) Small loans is two to 10 business days.

SBA Express

With loan amounts of up to $500,000, the SBA Express features a simplified application process and a 36-hour turnaround time for approval decisions from the SBA, making it ideal for businesses that need quick financing. Although the SBA guarantees up to 50% of the loan amount — less than the standard 75-85% for traditional 7(a) loans — it allows lenders to use their own documentation and underwriting procedures, which speeds up the process.

Recommended: EBITDA vs Net Income

Export Express

The Export Express Program is designed specifically for businesses that have been (or plan to become) involved in exporting and allows you to choose between a loan or line of credit. The maximum financing amount is $500,000. Loans are guaranteed 90% for loan amounts up to $350,000, and 75% for amounts over that amount. This program is ideal for exporters looking for a fast turnaround time. Loans are typically approved within 36 hours.

Export Working Capital

Export Working Capital loans are available through the U.S. Export Assistance Center for companies that need capital for their export sales. Look for the location that services your region — there are locations nationwide. Loans go as high as $5 million with a 90% SBA guarantee. Inventory is used as collateral and everyone with at least 20% ownership in the company must provide a personal guarantee for the funds.

International Trade

International trade is a type of long-term SBA financing up to $5 million. It helps businesses in two potential scenarios. The first is to help fuel the growth of export sales and the second is to help businesses make improvements in order to better compete with foreign companies. Funds used for permanent working capital, machinery, and equipment may be financed for 10 years, while real estate can be financed for 25 years.

CAPLines

CAPLines are designed for small businesses to meet their short-term and cyclical needs for working capital. There are four options, depending on your specific needs:

•  Seasonal CAPLine: This is used to finance increased seasonal inventory needs.

•  Contract CAPLine: This is used to finance costs of labor and materials for performing assignable contracts.

•  Builders CAPLine: This is used to finance small builder or general contractor projects, including the construction and renovation of both residential and commercial properties.

•  Working CAPLine: This is used for businesses that give credit to other businesses. It’s an asset-based line of credit that requires short-term payments.

Recommended: Understanding Working Capital Lines of Credit

Choosing the Right Type of Loan

Choosing the right type of SBA 7(a) loan depends on your business’s needs, financial situation, and goals. For working capital up to $5 million, the SBA Standard 7(a) loan is a popular option, while the 7(a) Small loan is ideal for smaller loan amounts and faster turnaround times.

Assess your purpose for the loan, the loan’s terms, and eligibility requirements to determine which option suits your business the best. Consulting with an SBA lender can also provide valuable insights.

SBA 7(a) Fees

SBA 7(a) loans typically come with a guarantee fee, which ranges from 0% to 3.75% based on the size of the loan. Veterans and service members who qualify for the Veterans Advantage Program (including Reservists and National Guard) can typically get the guarantee fee reduced.

The SBA does not allow lenders to charge prepayment penalties, origination fees, application fees, or similar extraneous fees. However, lenders are allowed to charge packaging and service fees involved in processing the loan.

Recommended: Typical Small Business Loan Fees

Pros and Cons of SBA 7(a) Loans

A 7(a) small business loan comes with both benefits and drawbacks. Here are some you may want to consider.

Pros:

•  Broad eligibility requirements

•  Competitive interest rates that are capped by the SBA

•  Funds may be used for a wide variety of purposes

•  Multiple options for loans of different sizes

Cons:

•  Slower funding timeframes compared to online business loans

•  Personal assets often required as collateral

•  Down payment often required

•  Extensive application checklist

💡 Recommended: SBA 504 vs 7(a)

The Takeaway

The SBA 7(a) loan is a popular option thanks to large loan amounts, low rates, and long repayment terms. If you are thinking about applying for a 7(a) loan, you’ll want to consider how you plan to use the loan funds and which 7(a) loan is best suited to your company’s size and industry.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Are SBA 7(a) loans hard to get?

SBA 7(a) loans can be challenging to obtain due to strict eligibility criteria, including a solid credit score, detailed financial documentation, and proof of business viability. However, businesses with strong financials and a clear repayment plan increase their chances, especially when working with experienced lenders familiar with SBA guidelines.

How much do you have to put down on an SBA 7(a) loan?

For an SBA 7(a) loan, borrowers typically need to put down 10% of the total loan amount as a down payment, though some lenders may require more depending on the business’s financial health and risk level.

What are the current interest rates on SBA 7(a) loans?

Current interest rates on SBA 7(a) loans range from 9.75% to 15.5%. However, your credit score will play a role in determining the rate you receive.

How long does the SBA 7(a) approval process take?

The SBA 7(a) loan approval process typically takes between seven to 10 business days once all required documentation is submitted. However, the full process, including underwriting and funding, can take several weeks. Delays may occur based on the complexity of the application or lender’s workload.

Can startups qualify for SBA 7(a) loans?

Yes, startups can qualify for SBA 7(a) loans, provided they meet certain criteria, such as being a for-profit business, operating in the U.S., and having a sound business plan. Lenders will also assess the owner’s creditworthiness, experience, and ability to repay the loan.

Photo credit: iStock/sturti

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q225-005