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 ensure 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 ensure that financial statements accurately represent the company’s financial position at any given point in time.

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.