What are accrued expenses?

Accrued expenses refer to costs that a business has incurred during a specific accounting period but has not yet paid or recorded in its financial statements. This means that the expense has been recognized in the accounting system, reflecting an obligation that the company has to make a payment in the future.

For instance, if a business receives services in December but does not pay for them until January, the expense needs to be recognized in December's financial statements to provide an accurate picture of the financial performance of the company for that period. This is in accordance with the matching principle in accounting, which states that expenses should be matched with the revenues they help to generate within the same period.

The other options do not accurately describe accrued expenses. Prepaid expenses indicate payments made in advance for services not yet received. Fixed costs are ongoing expenses that do not change with production levels and do not specifically refer to accruals. Fully paid expenses denote costs that have already been settled and do not meet the criteria of being accrued since there is no outstanding obligation.