Accrued cost is the cost of goods or services received or incurred during a period, when the lack of a supplier billing forces the buyer to accrue the related cost. The lack of a supplier billing is typically because the invoice is in transit, and does not arrive from the supplier until after the books have been closed for the reporting period.
A cost is accrued with a journal entry that includes the buying company's best estimate of the cost of the goods or services received. This information may come from an authorizing purchase order. This entry is set up as a reversing entry, so that it is automatically backed out of the accounting system in the next reporting period, when the supplier invoice will presumably arrive.
Though the use of accrued costs does result in more accurate financial statements, they also require a considerable amount of work to research and track. Consequently, most organizations only accrue costs when the amounts in question are above a materiality threshold; below that threshold, it is not cost-effective to record them.
Accrued costs are not used in a business that operates under the cash basis of accounting, since it only records transactions when there is a transfer of cash. In a cash basis system, costs are recorded when they are paid, which tends to delay the recognition of costs.
As an example of an accrued cost, a company receives goods from a supplier on the last day of the month, for which it will be billed $10,000. The supplier's invoice has not yet arrived when the company closes its books for the month, so the controller creates an accrued cost with a $10,000 debit to the inventory account and a credit to the accrued liabilities account. At the beginning of the next month, this entry is reversed, and the supplier invoice is recorded when it arrives.