Accrued liability definition
/What is an Accrued Liability?
An accrued liability is an obligation that an entity has assumed, usually in the absence of a confirming document, such as a supplier invoice. The most common usage of the concept is when a business has consumed goods or services provided by a supplier, but has not yet received an invoice from the supplier. When the invoice has not arrived by the end of an accounting period, the accounting staff records an accrued liability; this amount is usually based on quantity information in the receiving log and pricing information in the authorizing purchase order. The purpose of an accrued liability entry is to record an expense or obligation in the period when it was incurred.
Journal Entry for an Accrued Liability
The journal entry for an accrued liability is typically a debit to an expense account and a credit to an accrued liabilities account. At the beginning of the next accounting period, the entry is reversed. If the associated supplier invoice is received in the next accounting period, the invoice is entered in the accounting system. The effect of these transactions is:
In the first period, the expense is recorded with a journal entry.
In the second period, the journal entry is reversed and the supplier invoice is entered, for a net zero entry in the second period.
Thus, the net effect of these transactions is that expense recognition is shifted forward in time.
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Reversing Accruals
Most accrued liabilities are created as reversing entries, so that the accounting software automatically cancels them in the following period. This happens when you are expecting supplier invoices to arrive in the next period. A best practice is to reverse them in the following period automatically under all circumstances, simply to make sure that the initial entry is flushed out of the books every month. Otherwise, there is a risk that an accrued liability will linger on the books for an extended period of time, without anyone realizing that it is still there.
Presentation of Accrued Liabilities
An accrued liability appears in the balance sheet, usually in the current liabilities section, until it has been reversed and therefore eliminated from the balance sheet. A sample presentation of the accrued liabilities line item appears in the following exhibit.
Examples of Accrued Liabilities
There are many possible accrued liabilities. Here are several examples of them:
Accrued interest expense. This accrual is recorded when a company has a loan outstanding, for which it owes interest that has not yet been billed by its lender at the end of an accounting period.
Accrued payroll taxes. This accrual is recorded when a business incurs a liability to pay several types of payroll taxes when it pays compensation to its employees.
Accrued pension liability. This accrual is recorded when a company incurs a liability to pay its employees at some point in the future for benefits earned under a pension plan.
Accrued services. This accrual is recorded when a supplier provides services to a company, but has not billed it by the end of an accounting period.
Accrued wages. This accrual is recorded when a company owes wages to its hourly employees at the end of an accounting period, for which it is not scheduled to pay them until the next period.