The accrual concept in accounting requires companies to account for expenses when they occur. This requirement allows companies to record those expenses in the same period as they help generate revenues. However, companies may pay for them at a later date. The accruals concept does not consider the settlement relevant for recording the expense. Therefore, companies create accrued liabilities.
What Are Accrued Liabilities?
Accrued liabilities refer to expenses that companies have incurred but haven’t paid for yet. These are items that occur before the settlement takes place. Practically, accrued liabilities are prevalent in all areas within a business. For example, companies record their utility expense before paying for them. It allows them to increase their expenses. In exchange, they create accrued liabilities.
Accrued liabilities are a crucial part of the accrual concept in accounting. They appear on the balance sheet, usually under current liabilities. Similarly, accrued liabilities also impact the income statement by charging the expense to the period when they occur. Once companies pay for these expenses, they can reduce the associated liability created in the balance sheet.
What are the types of Accrued Liabilities?
In accounting, accrued liabilities do not have any types. However, companies can classify their expenses based on how frequently they occur. Based on that, they can also categorize their accrued liabilities into two categories. These include the following.
Routine accrued liabilities
Routine accrued liabilities include expenses that companies can expect to occur regularly. Also known as recurring accrued liabilities, they usually consist of operational expenses. For example, utility expenses can fall under routine accrued liabilities for most companies.
Non-routine accrued liabilities
Non-routine accrued liabilities are the opposite of routine. These include items that companies do not expect to occur regularly. Nonetheless, they contribute to increasing accrued liabilities. For example, they may consist of late payment charges that companies incur infrequently. These are also known as infrequent accrued liabilities.
What is the accounting for Accrued Liabilities?
The accounting for accrued liabilities involves two stages. The first is when the underlying expense occurs. Here, companies must record that expense and create an accrued liability. This process entails increasing both the expense and accrued liabilities account. The journal entries for accrued liabilities at this stage are below.
The other stage in accounting for accrued liabilities is when companies pay for them. As stated above, companies only create these liabilities when an expense occurs. However, they pay for it later. When they eventually do so, they must eliminate the accrued liability created before. The journal entries at this stage will be as below.
Examples of Accrued Liabilities
Accrued liabilities may come in various forms for companies based on their activities. Usually, they include the following items.
- Payroll expenses
- Utility expenses
- Advertising and promotion costs
- Interest expenses on loans
- Deferred payments
- Pensions and other benefits
- Year-end obligations
- Management bonuses
However, accrued liabilities do not include accounts payable. The difference between accrued liabilities and accounts payable is that the latter occurs to suppliers and vendors.
Accrued liabilities include expenses that companies have incurred but not paid for yet. These liabilities go on the balance sheet under the current liabilities section. Similarly, companies can separate them based on the frequency. The accounting for accrued liabilities is straightforward and involves two stages. Overall, these liabilities include prevalent items, such as those listed above.