When accrued expenses are recognized, how do they affect net income?

Accrued expenses are costs that have been incurred but not yet paid or recorded in the accounts. When these expenses are recognized, they are recorded as liabilities on the balance sheet and as expenses on the income statement. Recognizing accrued expenses decreases net income because expenses reduce the overall profit of a business during the accounting period in which they are incurred, regardless of whether the cash has been paid out.

For example, if a company incurs wages for employees that will be paid in the following period, the wages must still be recognized as an expense in the current period. This recognition reduces net income for that period, accurately reflecting the company’s true financial obligations and performance.

This reinforces the matching principle in accounting, which states that expenses should be matched with the revenues they help to generate within the same accounting period. By recording accrued expenses, the financial statements provide a more accurate picture of financial performance, impacting the bottom line negatively, and thus reducing net income.