What Are Accrued Liabilities?
Accrued liabilities are expenses that a business has incurred but not yet paid. They reflect the obligation to pay for goods and services received and are typically documented on the company’s balance sheet as current liabilities. Adjustments for these liabilities are usually made at the end of an accounting period.
Key Insights
- Definition: An accrued liability arises when a company incurs an expense that it has not yet paid.
- Occurrence: These liabilities form part of regular business operations and only exist when using accrual accounting methods.
- Accounting Process: Managing accrued liabilities involves debiting an expense account and crediting an accrued liability account. This is reversed with a debit to the accrued liability and a credit to the cash or expense account upon payment.
- Examples: Common accrued liabilities include payroll costs and payroll taxes.
Grasping the Concept of Accrued Liabilities
An accrued liability is a financial obligation incurred by a company within an accounting period but not yet paid during that time. Unlike cash accounting, where expenses are recorded when paid, accrual accounting records these expenses when they are incurred to present the most accurate financial picture.
Types of Accrued Liabilities
Accrued liabilities can be categorized into two main types:
Routine Accrued Liabilities
These are recurring liabilities that occur as part of everyday business operations. An example is interest accrued on loans, which may not be paid until the next period but is incurred regularly.
Non-Routine Accrued Liabilities
These are infrequent and unexpected expenses that are not part of a company’s normal operations. For instance, a unique legal fee billed during one period but to be paid later would fall into this category.
Recording Accrued Liabilities
To properly account for an accrued liability, the following journal entries are made:
- Debit the respective expense account.
- Credit the accrued liability account.
Upon payment, the original entry is reversed:
- Debit the accrued liability account.
- Credit the cash or expense account.
Common Situations Leading to Accrued Liabilities
- Deferred Payment Plan: Purchasing goods or services with payment scheduled for a future date.
- Employee Wages: Employees performing work for which payment hasn’t yet been made.
- Loan Interest: Interest accumulation on loans that hasn’t yet been paid since the last instalment.
- Taxes: Accrued taxes owing to government authorities but not yet payable until the next reporting period.
Differentiating Between Accrued Liabilities and Accounts Payable
While accrued liabilities arise from incurred but not billed expenses, accounts payable result from received vendor invoices requiring payment within a short timeframe. Ensuring timely payment of accounts payable helps avoid business defaults.
Examples of Accrued Liabilities
Here are a few common instances:
- Wage Expenses: For work already performed, typically payable in the next period.
- Goods and Services: Orders received but not immediately paid for.
- Interest: Outstanding interest on loans yet to be paid.
Accrued liabilities are integral to providing a transparent and accurate financial view under accrual accounting, enabling businesses to track obligations and manage expenses proactively.
Related Terms: liability, accounts payable, accrual method, cash basis, financial statements.
References
- Accounting Coach. “What are accrued liabilities?”
- CFI. “Accrued Liability”.
- Accounting Tools. “Accrued liability definition”.
- FreshBooks. “What Is Accounts Payable?”
- Patriot. “The Basics of Accrued Liabilities in Business”.
