Accrued Expenses: A Practical Guide for NZ Businesses

Accrued Expenses Defined

An accrued expense is simply an expense your business has incurred but hasn't yet been invoiced for or paid. Think of it as money you know you owe, but the bill hasn't arrived yet.

For hospitality businesses in New Zealand, common accrued expenses include:

• Labour costs - overtime hours, casual staff wages, holiday pay entitlements

• Freelancer fees - graphic design, marketing consultants, equipment repairs

• Utilities - power, gas, water bills that haven't arrived yet

• Purchases received but not invoiced - food deliveries, liquor stock, cleaning supplies

• Equipment rental - coffee machines, sound systems, temporary kitchen gear

• Inventory spoilage - estimated food waste and expired stock

• Waste disposal fees - rubbish collection, grease trap cleaning

• Freight costs - delivery charges from suppliers

Here's a typical scenario: Your Auckland café is swamped during December's holiday rush. You put permanent staff on overtime and hire casual workers to cope with demand. You also urgently order a new espresso machine that arrives on 28 December, but the supplier's invoice won't come until their next billing cycle in January. All these costs become payable next month, but you'd record them as accrued expenses in December when they were actually incurred.

Why Use Accrual Accounting

Accrual accounting records income when it's earned and expenses when they're incurred, regardless of when money changes hands. This differs from cash-basis accounting, which only records transactions when money actually moves.

For restaurant and café owners, accrual accounting provides much clearer financial visibility. Without it, your December might look artificially profitable because you haven't recorded those overtime wages and equipment costs yet. Come January, your books would show a sudden expense hit that doesn't reflect that month's actual trading.

This timing mismatch makes forecasting nearly impossible. How can you plan next quarter's menu pricing or staff levels if your financial reports don't show the real cost of generating revenue? Banks and investors also prefer accrual-based statements because they give a more accurate picture of business performance.

We might suggest accrual accounting if your business has seasonal peaks, carries significant inventory, or regularly has timing gaps between delivering services and getting paid. Most hospitality businesses above $60,000 annual turnover benefit from the clearer financial picture.

To adopt accruals, update your chart of accounts to include accrued liability accounts, standardise month-end procedures for estimating unbilled costs, and reconcile these estimates when actual invoices arrive.

How to Record Accrued Expenses

Recording accrued expenses properly keeps your financial statements accurate and your cash flow forecasting on track. Here's how to handle the process step by step.

Journal Entries — Examples

Accrued expenses always involve two accounts: you debit an expense account and credit an accrued liability account. When the actual invoice arrives, you reverse the accrual and record the real amount.

Labour accrual example:

• Debit: Wage Expense $2,500

• Credit: Accrued Wages (liability) $2,500

Utilities accrual example:

• Debit: Electricity Expense $450

• Credit: Accrued Utilities (liability) $450

Goods received, not invoiced:

• Debit: Food & Beverage Costs $1,200

• Credit: Accrued Payables $1,200

When invoices arrive, you'll reverse these accruals and move them to Accounts Payable:

• Debit: Accrued Wages $2,500

• Credit: Accounts Payable $2,480 (if actual invoice differs)

• Credit: Wage Expense $20 (to adjust for estimation difference)

Estimating Unbilled Costs

Getting decent estimates requires looking at historical patterns and current usage. For utilities, check your last three months' bills and pro-rate based on days in the current period. If your café typically uses 800 kWh monthly and you're estimating mid-month, use 400 kWh times your current rate.

For labour costs, use your roster data. If casual staff worked 60 hours at $23 per hour, that's $1,380 in wages plus ACC levies and KiwiSaver contributions. Most POS systems track these hours automatically.

Restaurant-specific estimates work well with operational metrics. Estimate spoilage at 3-5% of your food purchases, or calculate variable labour by dividing total covers by average covers per labour hour.

Be conservative with estimates - it's better to under-accrue slightly than create artificial losses. Round to reasonable amounts ($50 increments for smaller items, $100-200 for larger ones) and document your reasoning for audit trails.

Step-by-step in Accounting Software

Most NZ businesses use Xero or MYOB, both of which handle accruals through manual journal entries. In Xero, go to Business > Manual Journals, then create your accrual entries. Include clear descriptions like "Dec overtime accrual - estimate" and reference numbers for easy tracking.

Key fields to complete:

• Date: Last day of the accounting period

• Account: Expense account and corresponding accrued liability

• Description: What you're accruing and why

• Reference: Link to roster data, delivery dockets, or estimation notes

• Amount: Your conservative estimate

• Tracking categories: Location or department codes for multi-site restaurants

Tag accruals consistently so you can easily reverse them when invoices arrive. Many operators use "ACCR" in the reference field or create specific accrual account codes.

POS Integration & Case Study

Modern POS systems reduce manual accrual work by capturing real operational data. Rostering modules track labour hours automatically, inventory systems show stock movements in real-time, and delivery tracking flags goods received without invoices.

Here's how it works in practice: Sarah's Café, a 40-seat Auckland operation, uses their POS data for month-end accruals. In December, the system shows $2,500 in overtime hours (captured via roster data) and flags a $1,200 coffee machine delivery (logged by staff but not yet invoiced). Sarah records these as accrued expenses on 31 December.

On 5 January, the overtime payroll processes at $2,480 (slightly under her estimate), and the equipment invoice arrives for exactly $1,200. She reverses the accruals, records the actual amounts in Accounts Payable, and adjusts the $20 labour difference. Her December P&L accurately shows the real cost of that month's trading, and her January accounts start clean.

Accrued vs Payable & Prepaid

Accrued expenses and accounts payable are both liabilities, but they represent different stages of the expense cycle. Accrued expenses are costs you've incurred but haven't been invoiced for yet. Accounts payable are invoiced amounts you haven't paid yet.

The typical flow looks like this:

• Goods/services received → record as accrued expense

• Invoice received → move from accrued to accounts payable

• Payment made → clear accounts payable, reduce cash

Prepaid expenses work in reverse - you pay first, then use the goods or services over time. Think of your annual insurance premium or equipment lease payments made in advance.

For vendor management, set standard lead times with suppliers so you know when to expect invoices. When statements arrive, match them against your accruals and adjust for any differences. This process keeps your liabilities accurate and makes month-end reconciliations much simpler.

Tax & NZ Compliance

Accrual accounting affects when you can claim tax deductions in New Zealand. Under IRD timing rules, you can generally deduct accrued expenses in the year they're incurred, even if you haven't paid them yet. However, specific rules apply to different expense types.

For GST purposes, you typically can't claim input tax credits until you receive a valid tax invoice. The timing difference between accruing an expense and claiming GST can affect your cash flow, particularly for larger purchases.

Common compliance questions include:

• What are accrued expenses and how do they impact financial statements? They increase both your expense totals and current liabilities, giving a more accurate picture of profitability and what you owe.

• How does accrual accounting differ from cash basis accounting in New Zealand? Accrual records transactions when they occur; cash basis only when money changes hands. Most businesses over certain thresholds must use accrual for tax purposes.

• What tax deductions are available for accrued expenses in NZ? Generally, any legitimate business expense can be accrued and claimed, but complex situations require professional advice.

Keep detailed records for IRD audits: estimation calculations, supplier communications, delivery dockets, and payroll summaries. The Inland Revenue Department provides guidance on timing rules, and the External Reporting Board sets accounting standards. For borderline situations, consult a qualified accountant.

Automation & POS Integration

Automating accruals saves time and improves accuracy by using real operational data instead of guesswork. Rostering systems feed labour hour data directly to wage accruals, inventory systems track stock movements for COGS estimates, and delivery logs flag unbilled purchases.

General accounting systems like Xero and MYOB integrate with various POS platforms, but restaurant-focused systems capture more detailed operational data. While generic POS tools track basic sales, hospitality-specific platforms record menu-level performance, real-time stock movements, detailed labour rosters, and multi-location data.

Eats365, designed specifically for restaurants, integrates seamlessly with major accounting platforms to capture sales, inventory, and labour data in formats that make accrual estimates more accurate. Instead of manually calculating overtime or estimating food costs, the system provides real numbers based on actual roster hours and ingredient usage.

To set up integration, connect your POS to your accounting system, map chart of accounts correctly, run parallel trials for one month to test accuracy, and reconcile any differences. The initial setup effort pays off through reduced month-end workload and more reliable financial reporting.

This article is for informational purposes only and does not constitute legal, tax, or professional advice. For specific advice applicable to your business, please consult a qualified accountant or tax advisor.

Streamline Operations with Eats365

Free up your time to focus on crucial financial matters like managing accrued expenses. Eats365's POS system integrates seamlessly with accounting platforms, automating data capture for accurate accrual estimates. Contact Eats365 today for a free demo and discover how our solutions can simplify your operations in NZ.