Why your monthly P&L shows more profit than the business actually earned

A marketing agency owner we work with had a recurring problem. August finished with $18,500 in profit on the Profit and Loss report (P&L). That number looked solid. September arrived with three vendor invoices from August: an attorney fee for contract work completed in August ($4,200), a cloud hosting bill for August usage ($3,800), and a freelance design invoice from the last week of August ($2,100). September’s P&L looked like a rough month. August looked better than it was. Neither was accurate.

What accrued expenses are

When a business records expenses only after invoices arrive, the monthly P&L reflects billing cycles rather than actual activity. If a vendor bills on NET-30 terms, the cost appears a month after the service was rendered. If a contractor bills quarterly, three months of cost land in a single period.

An accrued expense is a cost that has been incurred but not yet billed or paid. Recording it in the period when the work happened, rather than when the invoice arrives, produces a P&L that reflects what the business actually spent to generate its revenue.

Four reasons expenses arrive after the period closes

Late-arriving vendor invoices. Professional services vendors, including attorneys, consultants, and engineers, often bill monthly or quarterly on NET-30 or NET-60 terms. An attorney who worked through August on a retainer may not issue the invoice until September 10. If the August books close before that invoice arrives, August’s P&L is understated by the full amount. The work happened. The cost did not appear.

Accrued payroll at period-end. When payroll runs biweekly, the last few days of a month are often earned but not yet paid when the books close. Employees who worked August 29 and 30 have earned wages for those days. A bookkeeper who records payroll only when the check clears will understate August labor by two to four days of wages. On a $42,000-per-month payroll, three unbilled days can represent $1,700 or more in unrecorded expense.

Subscriptions and service contracts billed quarterly or annually. A business that pays annually for software, or quarterly for a professional retainer, has a cost incurred every month but invoiced only three or twelve times per year. Booking those costs only when the invoice arrives creates an uneven expense pattern: two or three months of nothing, then a spike that looks like a bad month.

Utility and service bills that straddle two periods. A gas bill covering September 14 through October 15 arrives in late October. Half of that cost belongs to September, half to October. Without an accrual entry, October absorbs the full bill and September shows nothing.

What one month looked like with and without accruals

Here is August for the marketing agency, with and without the accrual step.

The $11,800 difference is not a bad September. It is August’s cost that arrived in September.

Why this matters

When owners use the monthly P&L to make decisions, they need numbers that reflect what happened in that period. A P&L showing $18,500 because three invoices have not yet arrived is not a sound basis for a hiring decision or a pricing review. When the real bills arrive the following month, the cash position looks worse than expected and the reason is not obvious.

Month-to-month comparisons become unreliable when accruals are missing. A month that looks strong may be a month when vendors billed slowly. A month that looks weak may be the month those invoices finally arrived. The pattern tells you nothing about actual performance.

Year-end close also becomes more difficult. An accountant reconstructing months of unbilled vendor costs before filing adds time and cost to a process that should be routine.

What accurate month-end accruals look like

For clients we work with, the month-end close includes a short accrual step before the P&L is finalized. The bookkeeper reviews vendor relationships with known costs, estimates the amount based on the contract or prior invoices, and posts a journal entry that puts the cost in the correct period. At the start of the next month, a reversing entry undoes the estimate automatically, so when the real invoice arrives it records once with no manual cleanup.

QuickBooks Online supports reversing journal entries natively. For a business with four or five known late billers, the full accrual step typically runs under 30 minutes at month-end.

Best practices for accurate monthly P&Ls

• Build a standing accrual list of vendors who regularly send invoices 15 or more days after the work is done. Review and post those estimates before closing each period.
• Use reversing journal entries so accruals clear automatically when the real invoice arrives. This eliminates the risk of recording the cost twice.
• Accrue payroll through the last calendar day of the period, not the last payroll run. Count the days between the final check and month-end, multiply by the daily rate, and post the estimate.
• For quarterly or annual subscriptions, divide the total cost by the number of months covered and recognize one portion each period rather than booking the full amount when the invoice arrives.
• Review the accrued expenses account balance at each close. Any item sitting there for more than 45 days should have a real invoice by now. If it doesn’t, follow up with the vendor.

Three questions worth asking

1. Which of your vendors regularly bills 15 or more days after the work is done, and are those costs appearing on the P&L in the month the work happened?
2. What is the balance in your accrued expenses account at the end of each month, and does it reflect all known costs for that period that have not yet been invoiced?
3. For any software or service billed quarterly or annually, how does the cost appear on each monthly P&L?

If those answers are uncertain, the monthly P&L is probably shifting costs between periods. The fix is a straightforward month-end process, not a software change. If your monthly profit numbers swing significantly without a clear change in revenue, send us three recent P&Ls and we can tell you whether the pattern reflects real business activity or billing-cycle timing.