Accrued Liability

It is the amount which the company has an obligation to pay for expenses incurred during the normal course of business activities. For example, accrued rent, accrued salaries, accrued utilities, etc.

Accrued liabilities are expenses that are yet to be paid by the entity. These are used to represent an entity’s financial position regardless if a cash transaction has occurred.

Recording accruals for expenses is part of the matching principle of accounting. As per the matching concept of accounting, all expenses incurred by the entity should be recorded in its accounting system to reflect its actual financial position and performance. When obligation arising from an accrued liability is settled, the entry used for recording the accrual is reversed, leaving zero balance in the accrued liability account. Accrued liabilities are basically the opposite of prepaid expenses.

Types of Accrued Liabilities

There are two types of liabilities associated with accrual of expenses which are as follows:

• Recurring
• Non-Recurring

Recurring

These result from regular business expenses. An example would be that of accrued salaries as an entity has to make payment to its employees every month.

Non-Recurring

This is the complete opposite of the recurring accrued liabilities and does not occur as part of the entity’s normal business operations. An example of a non-recurring accrued liability would be that of a purchase made from a supplier on a one-off basis in which the bill is yet been received by the entity.

Difference between Accrued Liabilities and Accounts Payable

Both are classified as current liabilities. The difference between the two is that accounts payable have been billed while accrued liabilities are yet to be billed to the entity by the supplier. Some accrued liabilities do not require billing as it is a regular business expense such as salaries paid to employees.

For example, if an entity has received goods from a vendor but has not yet a bill from the said vendor then in such a scenario the entity would record an accrued liability in its accounting software. On the other side if the entity has received the bill with the goods then the entity would record accounts payable.

Journal Entry

The journal entry used for recording an accrual involves a credit to accrued liabilities and debit to the corresponding expenditure. When the entity makes the payment, then it credits to cash and debits accrued liability. The journal entries for recording and settling accrued liabilities are as follows:

Recording Accrued Liability

Settling Accrued Liability

Examples of Accrued Liabilities

Accrued Services

A vendor has provided a service but has not yet billed the customer.

Accrued Interest Expense

This arises when an entity owes interest on loan but has not yet been billed by the person/ institution that has provided the loan.

Accrued Wages

Wages are accrued by the entity when it owes its employees for work completed because payroll is processed after the reporting date.

Accrued Liability Presentation

An accrued liability appears on an entity’s balance sheet under the head of current liabilities until it is reversed and therefore is eliminated from the entity’s statement of financial position.