Month-End Expense Accruals: Closing the Books Each Month for Accurate Financials and Forecasts

The Foundations of Accrual Accounting

Closing the books each month is a familiar race against time for many founders. You scramble to find every outstanding invoice, but critical expenses are often missing because the bills have not yet arrived. This common challenge distorts your burn rate, shakes investor confidence, and makes financial forecasts unreliable. Without a formal process, the month-end close becomes a chaotic exercise that consumes valuable time and creates compliance risks.

However, you can gain a true picture of your company's financial health by implementing a disciplined process for recording unpaid expenses. A simple month-end expense accrual system provides the clarity needed to produce accurate monthly financials and make confident cash decisions.

Moving from Cash to Accrual Accounting

Many early-stage companies begin by recording expenses only when cash leaves the bank. This method, known as cash-basis accounting, is simple but provides a dangerously delayed view of your performance. If you pay for a three-month software subscription in January, cash accounting shows a large expense in one month and zero for the next two. This volatility makes it nearly impossible to assess the underlying health of the business.

This is where accrual accounting becomes necessary. Accrual accounting is the practice of recording revenues when they are earned and expenses when they are incurred, regardless of when cash changes hands. This approach gives a far more accurate representation of a company's financial performance within a specific period.

The Matching Principle and Compliance Triggers

Accrual accounting is governed by a core concept called the Matching Principle. The Matching Principle is the formal accounting concept that requires expenses to be matched to the revenue they helped generate in the same period. For example, if your sales team earns commissions in March for deals that will be recognized as March revenue, you must record the commission expense in March, even if you do not pay it until April.

This isn't just a best practice. As a company grows, compliance mandates this shift. For example, "Accrual accounting is a requirement for financials to be compliant with US GAAP (Generally Accepted Accounting Principles)." Similarly, for British companies, "FRS 102 is the primary accounting standard that governs the recognition of expenses and liabilities." A scenario we repeatedly see is that startups are forced to adopt formal accruals when certain events occur. Key trigger points for formal accrual processes include reporting to a board, preparing for a 409A valuation, undergoing an audit, or seeking financing.

A 5-Step Guide on How to Record Accrued Expenses at Month End

Implementing a process for how to record accrued expenses at month end does not require a full-time accountant. For startups using QuickBooks or Xero, a systematic approach can be managed effectively by a founder or an operations lead. The goal is not perfection, but a reasonably accurate picture of your financial standing that supports better decision-making.

This process starts with setting a materiality threshold. A materiality threshold is an entity-specific value, such as $1,000, used to determine which unbilled expenses are significant enough to require accrual. You typically would not accrue a $50 software tool, but a $10,000 legal bill that has not been invoiced is a material expense that must be recorded.

1. Identify What's Missing
2. After the month ends, review your expected expenses and ask: what services did we use this month for which we have not received an invoice? This is a key part of any month-end close checklist. Common culprits include legal and professional fees, contractor invoices, marketing agency retainers, and utility bills that often arrive late.
3. For example, consider a SaaS startup that engaged a law firm for fundraising support in May. The work was completed in May, but the invoice for $15,000 has not arrived by the May 31st close. This is a material expense that was incurred in May and must be recorded in May's financials to accurately reflect the company's burn for that month.
4. Estimate the AmountYou do not need an exact invoice to make an accrual. A reasonable estimate is sufficient for producing timely financials. The method for estimation depends on the type of expense.
   • Fixed Contracts: For a marketing agency on a $5,000 monthly retainer, the estimate is simply $5,000, as documented in your contract.
   • Hourly Services: For variable professional fees, like the legal services example, you can ask the firm for a summary of hours worked or review the engagement letter to estimate the cost based on the agreed-upon rates and expected work completed.
   • Usage-Based Costs: For a deeptech startup using cloud services like AWS, you can log into the provider's billing dashboard. Most platforms show the unbilled, month-to-date usage, and you can use that figure for your accrual.
5. Record the Journal EntryOnce you have your estimate, you must record it in your accounting system. This is done with a journal entry. In accounting software like QuickBooks or Xero, you will create an entry that debits an expense account and credits a liability account, typically called 'Accrued Expenses' or 'Accrued Liabilities'. This action recognizes the expense on your Profit & Loss statement and the obligation to pay on your Balance Sheet.The journal entry for the legal fee example would be structured as follows:
   • Date: The last day of the month (e.g., May 31).
   • Debit: Legal & Professional Fees: $15,000 (this increases the expense on the P&L).
   • Credit: Accrued Expenses: $15,000 (this increases the liability on the Balance Sheet).
   • Memo: Accrual for May legal services from [Law Firm Name].
   This entry ensures your May financials correctly reflect the $15,000 legal expense, providing a more accurate monthly burn rate.
6. Track Everything in an 'Accrual Schedule'To manage this process and avoid errors, use a simple spreadsheet as an 'Accrual Schedule'. This schedule is your central log for recording unpaid expenses and is a critical part of your expense cut-off procedures. It provides a clear audit trail and ensures that no accruals are missed or duplicated. Your schedule should include key details for each accrued item.Key columns in a typical accrual schedule include:
   • Vendor: The name of the supplier or service provider.
   • Service Period: The month in which the service was rendered (e.g., May 2024).
   • Description: A brief note about the service provided.
   • Estimated Amount: The value of the accrual.
   • Date Accrued: The date the journal entry was posted.
   • Status: A field to track whether the item is accrued, the invoice has been received, or the accrual has been reversed.
7. Reverse the AccrualThis is the most important step and the one most often forgotten. On the first day of the next month (e.g., June 1), you must reverse the journal entry you just made. The reversal zeroes out the liability and creates a temporary negative balance in the expense account. When the actual invoice arrives later in June, you will enter it normally through your accounts payable process. The reversing entry cancels out the estimated expense, so the actual invoiced expense is the only one that remains on your books. This system prevents double-counting expenses.The reversing entry for the legal fee example would be:
   • Date: The first day of the next month (e.g., June 1).
   • Debit: Accrued Expenses: $15,000 (this decreases the liability).
   • Credit: Legal & Professional Fees: $15,000 (this creates a temporary negative expense).
   • Memo: Reversal of May legal services accrual.

Accrual Accounting in Practice: Industry-Specific Considerations

The principles of expense accrual are universal, but their application often varies by industry. Recognizing these nuances is essential for maintaining accurate records and optimizing financial strategy.

R&D-Intensive Industries: Biotech and Deeptech

For many technology and science-focused startups, the most significant accrued expenses are related to research and development. The treatment of these costs has specific tax and accounting implications that vary by location. "For US companies, R&D expenses may fall under Section 174 of the tax code, which has specific rules for capitalization and amortization that interact with accrual practices." This makes accurate recording of when R&D work was performed, not just when it was paid for, essential. For biotech and deeptech firms, this directly impacts financial models and tax planning.

Similarly, in the UK, the stakes are high. "For UK companies, accurate expense accrual is necessary to correctly claim R&D tax credits under the HMRC R&D scheme." If a lab contracts a research organization for work completed in March but the invoice arrives in April, that expense must be accrued in March to be correctly included in the R&D claim for that financial period. Failing to do so can result in lost or delayed innovation tax incentives.

E-commerce and Professional Services

Other industries have their own critical accruals. E-commerce startups using platforms like Shopify integrated with Xero must be diligent about accruing for the cost of goods sold (COGS). This is especially important for products that have shipped to customers at the end of a month but for which supplier invoices have not yet been processed. Recognizing this expense in the correct period is fundamental to calculating accurate gross margins.

For professional services firms, a major unbilled expense is often related to subcontractor costs or billable hours worked by staff on a project. Accruing for these costs within a given month is necessary to accurately measure project profitability and understand the true cost of revenue.

Implementing Financial Period Closing Steps in a Lean Startup

At this stage, those running finance usually face the challenge of implementing these financial period closing steps without a dedicated team. The reality for most pre-seed to Series B startups is more pragmatic. The key is to assign clear ownership for the accrual process to one person, whether it is a founder, an office manager, or an operations lead.

Create a simple month-end close checklist that includes reviewing key vendor contracts and communicating with department heads to identify any unbilled services. This process of proactively recognizing outstanding bills transforms the close from a chaotic exercise into a reliable system for producing accurate monthly financials. For more resources on building robust financial processes, see the expense management hub for related guides.

Frequently Asked Questions

Q: What is the difference between accrued expenses and accounts payable?
A: Accrued expenses are liabilities for goods or services that have been consumed but not yet invoiced by the supplier. Accounts payable represents liabilities for expenses that have been invoiced but not yet paid. Accruals are based on estimates, while accounts payable are based on actual invoices.

Q: How does a materiality threshold work in practice for a small startup?
A: A materiality threshold helps a startup focus on what matters. For instance, a company might set a $500 threshold. Any estimated unbilled expense below this amount is ignored to save time, while any expense above it must be accrued. This balances accuracy with efficiency during the month-end close.

Q: Do I need to accrue expenses if I use cash-basis accounting?
A: No, the concept of accruals is specific to accrual-basis accounting. If you operate strictly on a cash basis, you only record transactions when money changes hands. However, most growing businesses must switch to accrual accounting for accurate reporting to investors, lenders, and for tax compliance.

Q: How often should I perform the expense accrual process?
A: The expense accrual process should be performed every month as a core part of your month-end close. Consistency is key to producing reliable and comparable monthly financial statements. This regular cadence allows you to track performance accurately and make informed business decisions based on up-to-date data.