Title: Accrued Liabilities — What they are, how to record them, and a short checklist
Definition
– An accrued liability (also called an accrued expense) is a cost a company has incurred during an accounting period but has not yet paid and typically has not yet been billed. These obligations are recorded so expenses appear in the period when they were incurred, not only when cash changes hands.
Why this matters
– Under accrual accounting, expenses must be matched with the period that generated the related benefit (the matching principle). Accrued liabilities ensure financial statements show the correct expense level and the corresponding obligation at period end. They usually appear on the balance sheet as current liabilities.
Key points (summary)
– Only used under accrual accounting; cash-basis accounting does not record accruals.
– Recorded at period end and usually reversed when payment is made.
– Common examples: wages earned but unpaid at period end, interest that has accrued but not yet been paid, taxes owed, and unpaid utilities.
– Classified as current liabilities when they are expected to be settled within a year.
Types of accrued liabilities
– Routine (recurring) accrued liabilities: Regular operating expenses that routinely accumulate before payment. Example: interest on a loan that accrues each month but is paid quarterly.
– Non-routine (infrequent) accrued liabilities: Expenses that arise irregularly or unexpectedly and are not part of normal operations. Example: an unexpected professional fee incurred at year end with payment due next period.
How to record an accrued liability (journal entry)
1. At period end when the expense is incurred but unpaid:
– Debit: Expense account (increases expense on the income statement)
– Credit: Accrued liability (increases a current liability on the balance sheet)
2. When the amount is paid in the next period:
– Debit: Accrued liability (reduces the liability)
– Credit: Cash (or accounts payable if a vendor invoice is received)
Worked numeric example
Assumptions:
– Payroll week runs Dec 25–Jan 7.
– Wages attributable to Dec 25–Dec 31 equal $8,000 (earned but paid in January).
Dec 31 (to record accrued wage expense):
– Debit Wage Expense $8,000
– Credit Accrued Wages Payable $8,000
Jan (when payroll is paid):
– Debit Accrued Wages Payable $8,000
– Credit Cash $8,000
Notes:
– Some accountants use a reversing entry on Jan 1 to simplify payroll processing: Debit Accrued Wages Payable $8,000 and Credit Wage Expense $8,000, then process the normal payroll entries when cash is paid. Both approaches produce identical financial results if done correctly.
Accrued liabilities vs. accounts payable (AP)
– Accrued liabilities: obligations incurred but not yet billed or not billed at all (e.g., unpaid employee wages, accrued interest). Often recorded without an invoice.
– Accounts payable: recorded when an invoice is received from a supplier; usually short-term and tracked in an AP ledger. Both appear as current liabilities but arise from different timing and documentation.
Common examples of accrued liabilities
– Salaries and wages earned but unpaid at period end
– Payroll taxes and benefits accrued to be remitted later
– Accrued interest on loans
– Utility charges incurred but not yet billed
– Professional fees earned by a vendor but not yet invoiced
Checklist for accounting for accrued liabilities
– Identify costs incurred before period end that have not been paid or billed.
– Determine the amount to accrue (estimate if necessary and disclose estimation method).
– Record a debit to the appropriate expense and a credit to an accrued liability account.
– Classify as current liability unless settlement will clearly occur beyond 12 months.
– Reverse or clear the accrual when the liability is billed and/or paid.
– Document assumptions and estimates used for accruals for audit trail and disclosures.
Common pitfalls
– Failing to accrue routine items (e.g., payroll) understates expenses and liabilities.
– Over- or under-estimating accruals without documented rationale can misstate results.
– Leaving accruals on the books after payment results in duplicate expense recognition.
Assumptions and limits
– The guidance above assumes use of accrual accounting. Rules may vary by jurisdiction and under specific accounting frameworks (e.g., U.S. GAAP vs. IFRS) for complex or contingent obligations. Apply professional accounting standards where applicable.
Selected references
– Investopedia — Accrued Liability: https://www.investopedia.com/terms/a/accrued-liability.asp
– AccountingCoach — Accrued Expenses (explanation and examples): https://www.accountingcoach.com/accrued-expenses/explanation
– Financial Accounting Standards Board (FASB): https://www.fasb.org
– U.S. Securities and Exchange Commission (SEC) — Guide to reading financial statements: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_financialstatements
Educational disclaimer
This explainer is for educational purposes only and does not constitute accounting, tax, or investment advice. For specific transactions or complex situations, consult a qualified accountant or financial professional.