Accrued Liabilities: Overview, Types, and Examples

What Are Accrued Liabilities?

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 a liability for any number of obligations, and each is recorded on the company’s balance sheet. They are normally listed as “current liabilities” and adjusted at the end of an accounting period.

Understanding Accrued Liabilities

An accrued liability is a financial obligation that a company incurs during a given accounting period. Although the goods and services may already be delivered, the company has not yet paid for them in that period. They are also not recorded in the company’s general ledger. Although the cash flow has yet to occur, the company must still pay for the benefit received.

Accrued liabilities, which are also called “accrued expenses,” only exist when using an accrual method of accounting. The concept of an accrued liability relates to timing and the matching principle. Under accrual accounting all expenses are to be recorded in financial statements in the period in which they are incurred, which may differ from the period in which they are paid. The expenses are recorded in the same period when related revenues are reported to provide financial statement users with accurate information regarding the costs required to generate revenue.

The cash basis or cash method is an alternative way to record expenses, but it doesn’t accrue liabilities. Accrued liabilities are entered into the financial records during one period and are typically reversed in the next when paid. This allows for the actual expense to be recorded at the accurate dollar amount when payment is made in full.

Types of Accrued Liabilities

There are two types of accrued liabilities for which companies must account. We’ve listed some of the most important details about each below.

Routine Accrued Liability

A routine accrued liability is also referred to as a “recurring liability” and normally occurs as part of a company’s day-to-day operations. For instance, accrued interest payable to a creditor for a financial obligation, such as a loan, is considered to be one. The company may be charged interest, but it won’t pay for it until the next accounting period.

Non-Routine Accrued Liability

A non-routine accrued liability is an expense that doesn’t occur regularly. This is why it’s also called an “infrequent accrued liability.” It isn’t part of a company’s normal operating activities. A non-routine liability may, therefore, be an unexpected expense that a company may be billed for but won’t have to pay for until the next accounting period.

Journal Entry for an Accrued Liability

Accounting for an accrued liability requires a journal entry. An accountant usually marks a debit to the company’s expense account and a credit to its accrued liability account. This is then reversed when the next accounting period begins and the payment is made. The accounting department debits the accrued liability account and credits the expense account, which zeroes out the original transaction.

When Do Accrued Liabilities Occur?

Accrued liabilities arise for a number of reasons or when events occur during the normal course of business. For instance:

• A company that purchases goods or services on a deferred payment plan accrues liabilities because there is an obligation to pay in the future.
• Employees may perform work for which they haven’t yet received wages.
• Interest on loans may be accrued if interest fees were incurred since the previous loan payment.
• Taxes owed to governments may be accrued because they are not due until the next tax reporting period.

At the end of a calendar year, employee salaries and benefits must be recorded in the appropriate year, regardless of when the pay period ends and paychecks are distributed. For example, a two-week pay period may extend from Dec. 25 to Jan. 7.

Although they aren’t distributed until January, there is still one full week of expenses for December. The salaries, benefits, and taxes incurred from Dec. 25 to Dec. 31 are deemed accrued liabilities. These expenses are debited to reflect an increase in the expenses. Meanwhile, various liabilities will be credited to report the increase in obligations at the end of the year.

Accrued Liability vs. Accounts Payable

Accrued liabilities and accounts payable (also known simply as “payables”) are both types of liabilities that companies need to pay, but they are not the same. Accrued liabilities are expenses that have not yet been billed, either because they are a regular expense that doesn’t require a bill (e.g., payroll) or because the company hasn’t yet received a bill from the vendor (e.g., a utility bill).

Accounts payable are generally short-term obligations and must be paid within a certain amount of time (one year or less and often 30 to 60 days). Creditors send invoices or bills, which are documented by the receiving company’s accounts payable department and listed on the company’s balance sheet under “current liabilities.” The department then issues the payment for the total amount by the due date. Paying off these expenses within the specified time frame helps companies avoid default.

Examples of Accrued Liabilities

As noted above, companies can accrue liabilities for a host of different reasons. Many kinds of expenses fall under this category, including the following:

• Wage expenses: This is for work already performed by employees. The work is paid for in the next accounting period. This is common with employers who pay their employees biweekly, because a pay period may extend into the following accounting month or year.
• Goods and services: Some companies place orders and receive goods and services from their suppliers without paying for them immediately. The receiving company pays for these goods and services at a later date as an accrued expense.
• Interest: A company may have an outstanding loan for which the interest isn’t yet due. The lender may require this expense.

The Bottom Line

An accrued liability is an expense that a business has incurred but not yet paid for. These are goods and services already delivered to a company for which the costs must be paid in the future. They only exist when the accrual method of accounting is used.