Accrued liability

Definition

Accrued liability refers to an expense that a company has incurred but has not yet paid. It represents an obligation to pay for goods or services that have been received, but for which payment has not yet been made. This is a common concept in accrual accounting.

What is accrued liabilities?

A company records an accrued liability through an adjusting journal entry. It involves debiting (increasing) an expense account and crediting (increasing) an accrued liabilities account.

Accrued liabilities are important for accurate financial reporting. They make sure that financial statements reflect all expenses incurred in a given period, even if payments haven’t occurred yet.

Accrued liabilities are crucial for reflecting the true financial obligations of a company. They help make sure that financial statements accurately represent the company’s financial position at any given point in time.

Types of accrued liabilities

There are two types of accrued liabilities that companies must account for. These are:

• Routine accrued liabilities These liabilities, also known as recurring liabilities, come from a company’s regular operations. For example, accrued interest payable on a loan is considered a routine liability.
• Non-routine accrued liabilities Non-routine accrued liabilities, or infrequent accrued liabilities, are expenses that do not occur regularly and are not part of normal operating activities. These may include unexpected expenses.

Accrued liability vs. accounts payable

Accrued liabilities and accounts payable both represent amounts a company owes but differ in timing and recognition. Accrued liabilities are expenses incurred but not yet billed, such as wages earned by employees or interest on loans that will be paid in the next period. They are recorded when the expense is recognised. Accounts payable, on the other hand, are amounts billed to the company by suppliers for goods or services received and are typically due within a short period. They are recorded when the invoice is received.

Example of accrued liability

1. Employee salaries accrual:
   • At the end of the month, ABC Services has provided services to its clients, but the employees’ monthly salaries, totalling £10,000, will be paid in the next month.

   The accounting entry for the accrued liability is:

   $\text{Salaries expense}(Expense)=\; \pounds 10,000$

   $\text{Accrued liabilities}(Liability)=\; \pounds 10,000$

   This entry recognises the expense of employee salaries in the current month, even though the actual payment will be made in the following month.

2. Payment of accrued salaries:
   • In the next month, ABC Services pays the employees their salaries of £10,000.

   The accounting entry for the payment is:

   $\text{Accrued liabilities}(Liability)=-\pounds 10,000$

   $\text{Cash}(Asset)=\; \pounds 10,000$

   This entry reflects the reduction of the accrued liabilities and the payment made in cash.