Accrued Liability

What Is Accrued Liability?

Accrued liability is defined as the unpaid balance on goods or services the company has sold or provided or earned money from but have not yet been used or paid. 

‘Accrued liabilities’ appear in your credit report for three years. They usually refer to bills from your previous credit activities, from late fees to late renewals. These include unanticipated items or repair or replacement costs for equipment or services. Obtaining paid bills and paying them off early can help reduce the amount of credit cash balance remaining on your account, lowering the risk of a 30-day extension requiring repayment.

Understanding Accrued Liability

An accrued liability occurs when a company incurs an expense during a given accounting period. Rather than recording that expense as an expense, it is recorded on its balance sheet instead. Alternatively, some companies record this type of expense as a current liability and include specific notes in the corresponding footnotes or other spaces with additional information about the type of liability incurred and the specifics surrounding the expenses that led to this type of entry appearing on their balance sheet.

An accrued liability is an obligation that has been incurred, but that will be paid for later. It includes items such as accounts payable, sales taxes, rent, and insurance premiums. The concept is used to match the accounting of costs with the related revenue.

The cash basis or cash method is a type of accounting used to keep track of business expenses. This method does not recognize the accrued liabilities. Accrued liabilities are costs that have been incurred but have not yet been paid. This method allows businesses to record the actual expense amount when payment is made in full.

Types of Accrued Liabilities

1. Routine or Recurring expense

A routine or recurring expense is incurred by a business in the course of its normal operations and typically occurs regularly. Routine/Recurring expenses may be capitalized in the financial statement for tax purposes and are recognized in the period the expense is incurred or recognized. When managed correctly can be beneficial to any business consistently. It not only impacts business profitability but employee retention, productivity, or the quality of customer service. 

Examples: Capital outlays consist of the capital expenditures for research and development, extension and rental equipment, buildings lease payments, warranties, salaries, and wages. Operations outlay consist of personnel overtime, supplies, rent, depreciation on assets, and supplies.

2. Non-routine liabilities

Non-routine liabilities comprise non-recurring expenses, such as sales claims, warranties, taxes, and license fees. In addition, the company generally consumes unanticipated liabilities through reduced margins and increased interest payments on accounts already in arrears.

3. Journal Entry for an Accrued Liability

To account for an accrued liability, an accountant makes a journal entry. The accounting department debits the cash or expense account and credits the accrued liability account. Before the next accounting period, the company receives payment from the customer. They debit the appropriate account to reverse out the previous transaction. The money goes into the cash account, where it can be used to pay other bills. The accounting department usually makes this adjustment at the end of an accounting period.

When Do Accrued Liabilities Occur?

In accounting, an accrued liability is a liability that exists because of an event that occurred during the normal course of business; it’s recorded even if payment doesn’t happen until some unspecified future time.

Accrued Liabilities can occur-

  • Whenever a business must pay for goods or services but hasn’t yet paid, it has accrued liabilities.
  • A business will use accrued liabilities such as accrued wages or unbilled services to account for time spent but not yet paid.
  • If interest has accrued since the last payment was made, this amount will show on the invoice.
  • A company needs to report any taxes owed to governments as accrued liabilities until they are due.

Accounting for salaries and benefits depends on the pay calendar. If the two weeks of December 25 to January 7 are paid in January, it affects the profit or loss from December. It impacts the end-of-year balance sheet as an accrued liability. Even though the company doesn’t receive salaries, benefits, and taxes until after the new year begins, expenses for these items still occur during the last week of December. This is reflected on the financial statement as an accrued liability.

Accrued Liability vs. Accounts Payable (AP)

Accrued liabilities and accounts payable both have to be paid eventually. The difference lies in when the payments are to be made. An accrued liability is one for which payment is due in the future, while AP represents payments due immediately. Accounts payable typically refer to expenses that need to be paid within 90 days of making the purchase. Accounts payable include rent, utilities, salaries and wages, and purchases made on credit or cash discounts.

Accounts payable (AP) are paid to creditors within a certain amount of time. These expenses are based on invoices received from AP vendors after placing an order for the goods and materials. The AP department must pay off these expenses to avoid penalties from defaulting on payments.

Accrued Liabilities are the amounts of money a customer owes to you but hasn’t paid yet. It can be several items if you have more than one customer. They are typically abandoned when unpaid, but some special rules and red flags can give you special rights to pursue them.

Examples of Accrued Liabilities

  • Wage Expenses- Wage Expenses are for work performed by employees. The work is accounted for at the time it is incurred.
  • Goods and Services- Accounting for accrued expenses is a straightforward process. An expense accrues when goods are purchased on credit or services are performed in exchange for future payment.
  • Interest- The company may have a loan for which they are currently paying interest only.

Other examples include

  • Accrued interest,
  • Unpaid bills, 
  • legal fees, 
  • rent,
  • taxes, 
  • maintenance,
  • repair expenses.

Accrued liabilities on the balance sheet

Normally, the journal entry for accrued liabilities is a debit to an expense account. A credit to an accrued liabilities account is then reversed at the start of the next accounting period, providing you with a net-zero entry, shifting the expense recognition forward to the appropriate accounting period.