Accrued expenses are the expenses which have been incurred but not yet due and hence not yet paid also. It represents a liability that a firm has to pay for the services already received by it. It includes wages and salaries, interest and taxes. It is a cost free source of financing. Accrued wages and salaries denote obligations payable by the company to its employees. Accrued taxes and interest form one more means of financing. This is a delayed payment of the company’s commitment and therefore, is a mean of finance. It is a partial source of financing working capital.
Wages and salaries are usually paid on monthly, fortnightly or weekly basis for the services already rendered by employees. Income tax is paid periodically much after the profits have been earned. Interest is paid periodically while the funds are used continuously by the firm. The amount of accruals varies with the change in the level of activity of a firm. When the activity level expands, accruals also increase and hence they provide a spontaneous source of financing.
