What Are Accrued Liabilities? (With Definition and Examples)

The term “accrued liability” refers to an expense incurred but not yet paid for by a business. These are costs for goods and services already delivered to a company for which it must pay in the future. A company can accrue liabilities for any number of obligations and are recorded on the company’s balance sheet.

Accrued Liabilities | How to Record Accrued Liabilities?

Types of accrued liabilities

Regular or recurring accrued liabilities and irregular or non-routine accrued liabilities are the two categories into which accrued liabilities typically fall. Understanding the distinction between these two expenses will help you maintain accurate records and foresee future payments and costs. Here are the descriptions of each type of accrued liability to assist you in organizing your own balance sheet:

Routine or recurring accrued liabilities

Regular expenses that are a part of regular business operations are referred to as “routine accrued liabilities,” also known as “recurring accrued liabilities.” For instance, employee wages may fall into this category since they may be paid after being recorded in the books. Recurring accrued liabilities can frequently be used to aid in financial projections for a company or organization.

Infrequent or non-routine accrued liabilities

Non-routine accrued liabilities, also known as infrequent accrued liabilities, are expenses that a company doesn’t anticipate accruing. For instance, because they don’t typically occur in the course of business and aren’t particularly predictable, late payments on invoices may be categorized as this type of accrued expense. When deciding how much liquidity to hold available, keep potential non-routine accrued liabilities in mind.

What are accrued liabilities?

Unpaid expenses that a company owes or will be required to pay within a specific accounting period, typically a month, are referred to as accrued liabilities. The phrase is primarily only employed by companies or organizations that employ accrual accounting as their method of bookkeeping. This method of accounting records expenses as they happen, regardless of when they are actually paid. When the business makes a payment, they are then subtracted from the general ledger, or transaction record.

For instance, accrual accounting would still account for a bill on its due date if it is due on the 25th day of each month but the check doesn’t clear until the 2nd day of the following month. Although the actual payment won’t show up in the general ledger until later, this is still accurate. In contrast to cash-basis accounting, which records expenses when they are formally paid, Accrued liabilities can be a useful tool for assessing a company’s financial obligations, but figuring out how much cash that company has on hand can be more difficult.

The difference between accrued liabilities and accounts payable

Due to the fact that both accrued liabilities and accounts payable record current expenses, typically for the current month, they function similarly. They differ because accounts payable have been billed, but accrued liabilities have not. Payroll, for instance, is typically regarded as an accrued liability because it involves no billing. An accrued liability is a process that accounts for materials that have been received but have not yet been billed.

Examples of accrued liabilities

For assistance with your own accounting, consider the following additional examples of accrued liabilities:

Payroll

Employee benefits and wages are typically regarded as accrued liabilities. This is so because workers typically complete tasks prior to being paid. Payroll obligations are frequently taken into account by businesses before paying their employees.

Pensions and other benefits

Pensions and other payments made to employees that are earned but not yet distributed are known as accrued liabilities. When it comes to these payments, it’s possible that they’ll arrive after the employee earns them by more than one accounting period.

Management bonuses

Similar to payroll, management bonuses are frequently calculated before being distributed to the recipients. This is particularly true if a manager earns a bonus during one accounting period and is paid during the following one. For instance, if a manager’s September performance earns them a bonus that is paid in October.

End-of-year obligations

Late-December billing and invoicing are frequently not paid until the following year. These costs are frequently regarded as accrued liabilities because they are incurred during one accounting period and paid during another.

Some advertising and promotion

If advertising and promotion expenses are included in the balance sheet prior to billing, they are considered accrued liabilities. For instance, if your business has a per-engagement contract with a social media marketing agency, you could project the cost for a typical one-month period and record that cost for the month in which those engagements took place. The actual payment could happen this month or later.

Utilities

Because they are billed during an accounting period after the service has already been rendered, some utilities are accrued liabilities. An office’s monthly electricity usage for heating, for instance, is totaled and billed the following month. This meets the criteria for an accrued liability because the cost was incurred in one month and billed and paid for in the following. This category might also include other metered services like gas and water. In general, prepaid services like phone service don’t count as accrued liabilities.

Deferred payments

Deferred payment arrangements are frequently regarded as accrued liabilities. For instance, using a store’s business credit option to buy materials results in an accrued liability because those expenses must eventually be paid.

Loan interest

Typically, loan interest is paid following the time that the loan is recorded in a company’s balance sheet. For this reason, it is an accrued liability.

Taxes

When taxes are paid after being noted in a company’s ledgers, they are sometimes referred to as accrued liabilities. The specific payment schedule will determine whether or not this is true in a particular circumstance.

FAQ

What are examples of accrued liabilities?

An expense that a business incurred during a specific time period but has not yet been billed for is known as an accrued liability. There are two types of accrued liabilities: routine/recurring and infrequent/non-routine. Expenses for accrued interest, wages, and services are a few examples of accrued liabilities.

Is accrued liabilities a current asset?

In terms of accrued liabilities, these are costs that have already been incurred and must be reimbursed. As a result, in accordance with the matching principle, they should be treated as current liabilities to indicate that they are obligations that must be satisfied in the immediate future.

What is the journal entry of accrued liability?

A debit to an expense account and a credit to an accrued liabilities account are typically the journal entries for an accrued liability. The entry is changed to the opposite at the start of the following accounting period.

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