EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login

Accrued Liabilities

Home » Finance » Blog » Corporate Finance Basics » Accrued Liabilities

Accrued Liabilities

Definition of Accrued Liabilities

Accrued liabilities are those expenses that are incurred by the business but not yet paid. Accrued expense is a part of accrual system of accounting, which states that an expense is recorded when it is incurred, and revenue is recorded when it is earned.

This system of accounting generates more accurate results as the expenses are matched with related revenues and are reported when the expense occurs, not when cash is paid.

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Explanation

Accrued liabilities are the actual liabilities, the benefit against which is received by the business, but they are not yet paid.  For example, services of the employees have been received, but their salary is yet to be paid, or goods have been received, but payment is yet to be made. Here, payment has to be done in the future period of time. If we don’t record such expenses in our books, it will not reflect a true financial picture of the company’s business. The concept of accrual liabilities occurs only when the business follows the Accrual system of accounting.

An Accrual system of accounting is a system in which all the expenses of a particular period are recorded in the same period in which they are incurred irrespective of the fact whether they are paid or not. Accrued liabilities are not accounted for when the business follows the cash basis of accounting. Under the Cash basis of accounting, only those expenses are accounted for which are paid during that period of time. Accrued liabilities are shown under the current liabilities head in a company’s balance sheet.

How Does an Accrued Liability Work?

Accrued liabilities are recorded in the books of accounts at the end of the accounting period, and they are reversed in the period when they are actually paid. It is like a temporary account created in the books of accounts.

Accounting entry for accrued liability

Expense A/c – Debit (Recording the actual expense)

Accrual Liability A/c – Credit (expense not paid hence liability created)

Popular Course in this category
Sale
Business Valuation Training (16 Courses)16 Online Courses | 80+ Hours | Verifiable Certificate of Completion | Lifetime Access
4.5 (9,226 ratings)
Course Price

View Course

Related Courses
Equity Research Training (17 Courses)Project Finance Training (8 Courses with Case Studies)

Accounting entry when paying accrued liability

Accrual Liability A/c – Debit (Reducing the liability settled)

Cash A/c – Credit (Liability settled by paying cash)

The Accrued liabilities balance in the balance sheet will be reduced after making the payment.

Example of Accrued Liabilities

Suppose Company ABC Ltd. closes its books of accounts on 31 December every year. The company makes salary payment of all of its employees on 5th of next month. So, the salary of December month will be paid on 5th January of next fiscal year, i.e. 2020. December month’s salary to be paid is $50,000.

In this case, the liability to pay the employees has been incurred, but the payment is not yet done. Hence, salary expenses will be recorded, and an opposite accrued liability for the same will be created in the books of accounts, and the same will be reversed next month.

Example of Accrued Liabilities

Accrued Liabilities-1.2

Types of Accrued Liabilities

There are basically two types:

  • Recurring accrued liabilities: These are the ones which occur in the normal course of business. For example, wages of the current month paid on 10th of next month.
  • Non-recurring accrued liabilities: These are not the regular accrued liabilities and do not occur in the normal course of business. For example, heavy machinery was purchased, but payment was not yet made.

Accrued Liabilities vs Accounts Payable

  • The basic difference between accrued liabilities and accounts payable is that the accounts payable is billed to the company, but accrued liability is not yet billed.
  • Another difference is that the accounts payable is a liability which will be paid in the near future. On the other hand, accrued liability is generally accrued and paid over a period of time.
  • Accounts payable is recorded for any expense which is billed like supplier invoice, vendor payment etc. While accrued liabilities are recorded at the end of the fiscal year.
  • For example, a company purchases machinery from a supplier on 30 Dec 2019, the shipment of which will arrive in the next 15 days. If the company receives the invoice on or before the end of the accounting year, it will be booked as accounts payable. If the invoice is not received, it will be booked as an accrued liability.

Advantages

Following are the advantages of recording accrued liabilities:

  • Following the accrual system of accounting, it gives a true and fair picture of the company financial position. All the revenues of the current period and the expenses incurred to earn those revenues are recorded in the same accounting period. It will reflect the actual profit/loss of the company.
  • The Accrual system of accounting is a preferred system of accounting by the Financial Accounting Standard Board (FASB).
  • Financial statements prepared using the accrual system of accounting is more comparable as compared to the cash system of accounting.

Disadvantages

Following are the disadvantages of recording accrued liabilities:

  • It is a complex system of accounting and requires competent personnel who can track and report the transaction in a timely manner.
  • It does not provide an accurate picture in terms of sales and cash. The company’s sales may be much higher as compared to its actual cash position.
  • It does not provide much benefit to small businesses where most of the transactions are done on a cash basis.

Conclusion

Accrued liabilities or accrued expenses are the expenses which are incurred by the business in one period, but the payment will be done in another period. This way of recording the expenses gives us the true picture of accounting.

Recommended Articles

This is a guide to Accrued Liabilities. Here we also discuss the definition and how does accrued liabilities work? along with advantages and disadvantages. You may also have a look at the following articles to learn more –

  1. Financial Liabilities
  2. Current Liabilities Examples
  3. Current Liabilities
  4. Long Term Liabilities

All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)

250+ Online Courses

40+ Projects

1000+ Hours

Verifiable Certificates

Lifetime Access

Learn More

0 Shares
Share
Tweet
Share
Primary Sidebar
Finance Blog
  • Corporate Finance Basics
    • BPO vs KPO
    • C Corporation
    • Brick and Mortar
    • Business Entity Concept
    • Bounced Check
    • Capital Maintenance
    • Bridge Financing
    • Business Exit Strategy
    • Callable Bonds
    • Affiliated Companies
    • Certified Check
    • Chattel Mortgage
    • Contingent Beneficiary
    • Debt Collector
    • Closed Corporation
    • Cumulative Voting
    • Consumer Loan
    • Commercial Loans
    • Collateralization
    • Commercial Credit
    • Collection Agency
    • Classification of Financial Markets
    • Class Action Lawsuits
    • Prudence Concept in Accounting
    • Calmar Ratio
    • Asset Classes
    • Audit Evidence
    • Contingent Liability
    • Employee Stock
    • Financial Liabilities
    • Incurred Cost
    • Partial Income Statement
    • Deferred Tax Asset
    • Tax Fraud
    • Non-Operating Income
    • Variable Costing
    • Mixed Cost
    • Prime Cost
    • Regressive Tax Examples
    • Unqualified Opinion of Auditor
    • Bonds Payable
    • Class A Shares
    • Contingent Liability Example
    • Contingent Shares
    • Contributed Capital
    • Brownfield Investment
    • Internal Audit
    • Indirect Taxes
    • Fund Management
    • Fixed Cost
    • Debt Equity Swap
    • Cash Flow Hedge
    • Risk Shifting
    • High Yield Investments
    • General Obligation Bond
    • Forward Market
    • Box Spread
    • Fixed Income Trader
    • Trade Discount
    • Quick Assets
    • Notes Payable
    • Revenue Bonds
    • Euribor
    • Settlement Date
    • Short Covering
    • Short Selling
    • Dividend Examples
    • Time to Market
    • Junior Accountant
    • Commodity Derivatives
    • Flash Report
    • Idle Time
    • Leasehold Improvement
    • Product Portfolio
    • Risk Parity
    • Branch Accounting
    • Credit Enhancement
    • Basis Trading
    • At the Money
    • Collateralized Mortage Obligation
    • Accounts Receivable
    • Long Term Investments
    • Negative Goodwill
    • Recourse Factoring
    • Residual Value
    • Short Term Loan
    • Tax Exempt
    • Audit Report Format
    • Cash Investment
    • 457 Plan
    • Audit Procedure
    • Audit Materiality
    • Audit Committee
    • Asset Allocation
    • Non-Cash Expenses
    • Dividend Policy Types
    • Credit Terms
    • Dividend Payable
    • Profit Center
    • Absorption Costing
    • Final Dividend
    • Hybrid Securities
    • Other Current Assets
    • Simple Random Sample
    • Dependency Ratio
    • Effective Duration
    • Loan to Value Ratio
    • Inventory Turnover Ratio
    • Advantages of Ratio Analysis
    • Loss Ratio
    • Delaware Corporation
    • Debt to GDP Ratio
    • Articles of Incorporation
    • Negative Covenants
    • Statutory Liquidity Ratio
    • Leverage Ratio for Banks
    • Accrued Liabilities
    • Activity Ratio
    • Debt Service Coverage Ratio
    • Return on Investment Ratio
    • Turnover Ratios
    • Cash Conversion Cycle
    • Lumion vs V-Ray
    • Capital Intensive
    • Voided Check
    • Negotiable Instruments
    • Portfolio Optimization
    • 401k Plan
    • Non-Marketable Securities
    • Stock Certificate
    • Treasury Stock
    • Appropriate Retained Earnings
    • Stockholder
    • Share Vesting
    • Shares Issued
    • Preferred Shares
    • Share Buyback
    • Shareholder Types
    • Tax Loss Harvesting
    • Statutory Audit
    • Audit Risk
    • Fund of Funds
    • Accredited Investor
    • Cost Centre
    • Lessee
    • Golden Handcuffs
    • Ordinary Shares
    • Restricted Stock Units
    • Goodwill Valuation
    • Share Classes
    • Lessor
    • Preferred Dividends
    • LIFO Liquidation
    • Dilutive Securities
    • Restructuring Cost
    • Non-Cumulative Preference Shares
    • Pass Through Entity
    • Management Discussion and Analysis
    • Premium on Stock
    • Leveraged Loans
    • Dividend
    • Dividend Policy
    • Financial Reporting Objectives
    • Financial Reporting
    • Internal Controls
    • Capital Investment
    • Debt to Equity Ratio
    • Dividend Growth Rate
    • Market Capitalization
    • Deal Origination
    • Importance of Working Capital
    • SWOT Analysis
    • White Knight
    • Root Cause Analysis
    • Realized Gain
    • Return on Operating Assets
    • Offshore Investments
    • Transfer Price
    • Times Interest Earned Ratio
    • Debt Coverage Ratio
    • Dividend Discount Model
    • Combined Ratio
    • Merger Arbitrage
    • Gordon Growth Model
    • Advantages of Joint Venture
    • Interest Coverage Ratio
    • Reserve Requirements
    • Asset Turnover Ratio
    • Price to Rent Ratio
    • Ratio Analysis Types
    • Debt Ratio
    • Business Risk
    • Financial Leverage
    • Dividend Payout Ratio
    • Mistakes in DCF
    • Risk/Reward Ratio
    • Full Form of FIPB
    • Financial Risk
    • CAPE Ratio
    • Overcapitalization
    • Systematic Risk
    • Hedge Ratio
    • Full Form of NHB
    • Sensitivity Analysis
    • Current Ratio
    • Corporation Examples
    • Asset to Sales Ratio
    • Balance Sheet Ratios
    • List of Financial Ratios
    • Coverage Ratio
    • Forward PE Ratio
    • Interpretation of Debt to Equity Ratio
    • Capitalization Ratio
    • Importance of Ratio Analysis
    • Quick Ratio Interpretation
    • Corporate Finance Basics
    • PEG Ratio
    • Corporate Finance Interview Questions
    • Price to Earnings Ratio
    • Structured Note
    • Limitations of Ratio Analysis
    • NPV vs IRR
    • IRR vs ROI
    • Imputed Interest
    • Full Form of HR
    • Shareholders Agreement
    • Earnings Per Share
    • Corporate Finance Jobs
    • About Corporate Finance
    • Corporate Finance Theory & Practices
    • Career in Corporate Finance
    • Simple Interest Rate vs Compound Interest Rate
    • Stocks vs Shares
    • Bonds vs Debenture
    • Bull Market vs Bear Market
    • Mortgagee vs Mortgagor
    • Horizontal Integration vs Vertical Integration
    • Money Market vs Capital Market
    • Leveraged vs Unleveraged
    • Dividends vs Capital Gains
    • Present Value vs Net Present Value
    • Qualified vs Ordinary Dividends
    • ROE vs ROA
    • Bond vs Loan
    • Stock Dividend vs Stock Split
    • Audit vs Assurance
    • Coupon Rate vs Interest Rate
    • Growth Stock vs Value Stock
  • Accounting fundamentals (614+)
  • Asset Management Tutorial (181+)
  • Banking (43+)
  • Credit Research Fundamentals (6+)
  • Economics (44+)
  • Finance Formula (382+)
  • Financial Modeling in Excel (13+)
  • Investment Banking Basics (114+)
  • Investment Banking Careers (26+)
  • Trading for dummies (67+)
  • valuation basics (27+)
Finance Blog Courses
  • Online Business Valuation Training
  • Equity Research Certification
  • Project Finance Course
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Special Offer - Online Business Valuation Training Learn More