In terms of financial reporting, what does the term 'accrued expenses' refer to?

Accrued expenses refer to costs that a business has incurred but has not yet paid. This is a crucial aspect of the accrual basis of accounting, which states that expenses should be recognized when they are incurred, regardless of when cash is actually paid. By recording accrued expenses, companies ensure their financial statements reflect all liabilities related to the current accounting period.

For instance, if a company receives a service in December but doesn’t pay for it until January, the expense must be recorded in December's financial statements to accurately depict the company's financial position and performance for that month. This proper matching of revenue and expenses is fundamental to providing an accurate representation of a company's financial condition.

In contrast, the other options describe situations that do not align with the definition of accrued expenses. Expenses that have been paid but not incurred do not exist in accounting; instead, they would be reflected as prepaid expenses. Expenses based on estimates refer to situations such as estimated warranty liabilities or bad debt expenses, which involve judgment, but do not specifically match the criteria for accrued expenses. Finally, while expenses can decrease equity, that is a broad consequence of reducing net income which doesn’t define accrual accounting principles specifically.