What Are Accrued Liabilities?

What Are Accrued Liabilities?

Let me explain accrued liabilities directly: they're expenses your business has incurred but hasn't paid for yet. These cover costs for goods and services already delivered to your company, which you'll need to pay in the future. You record them on your balance sheet as current liabilities, and you adjust them at the end of each accounting period.

Understanding Accrued Liabilities

You need to grasp that an accrued liability is a financial obligation your company takes on during a specific accounting period. Even though the goods or services are already in hand, payment hasn't happened yet, and it's not in your general ledger. But you still owe for the benefit received, so it must be accounted for.

These only come into play with accrual accounting, tied to timing and the matching principle. In accrual accounting, you record expenses in the period they're incurred, not when paid, to match them with related revenues accurately. Cash basis accounting skips this entirely. You enter accrued liabilities in one period and reverse them in the next when you pay, ensuring the expense hits at the right amount.

Types of Accrued Liabilities

There are two main types you should account for. Routine accrued liabilities, or recurring ones, happen in your day-to-day operations—like interest payable on a loan that you get charged for but won't pay until the next period.

Then there are non-routine accrued liabilities, which are infrequent and not part of normal activities. These could be unexpected bills that arrive but aren't due until later, so they're accrued now.

Accrued Liability Journal Entries

When you handle an accrued liability, you make a journal entry: debit the expense account and credit the accrued liability account. Once the next period starts and you pay, reverse it by debiting the accrued liability and crediting the cash or expense account. This clears everything out properly.

When Accrued Liabilities Occur

These liabilities pop up during regular business events. For example, if you buy goods or services on deferred payment, you accrue the liability because payment is future. Employees might work without immediate pay, so wages accrue. Interest on loans accrues if fees build up since the last payment. Taxes can accrue if they're not due until later.

At year-end, you record salaries and benefits in the correct year, even if paychecks go out later. Say a pay period crosses from December to January—you accrue the December portion as a liability.

Accrued Liability vs. Accounts Payable

Don't mix up accrued liabilities with accounts payable; both are debts, but they're different. Accrued liabilities are unbilled expenses, like payroll or pending utility bills without invoices. Accounts payable are short-term, usually with invoices, paid within 30 to 60 days, and handled by your AP department.

Examples of Accrued Liabilities

You see accrued liabilities in various expenses. Wage expenses accrue for work done but paid later, common in biweekly payroll. Goods and services received without immediate payment become accrued expenses. Interest on loans accrues if not yet due.

Frequently Asked Questions

Why does a company accrue liabilities? You do it for any obligations, recording them as current liabilities on the balance sheet and adjusting at period-end.

How do they work? They're obligations for delivered goods or services not yet paid or ledgered, but you must pay eventually.

How many types are there? Two: routine for daily operations and non-routine for infrequent expenses.

The Bottom Line

In summary, accrued liabilities are expenses your business incurs but hasn't paid, for goods and services received, and they only apply in accrual accounting.