Understanding your company’s true financial position, regardless of which transactions have actually been made, has a vital role to play in maintaining a healthy cash flow. As such, it’s crucial to have a solid grasp on your firm’s accrued liabilities. So, what are accrued liabilities? Find out everything you need to know about this vital accounting term, including our guide to the differences between accrued liabilities and accounts payable.
Accrued liabilities explained
Accrued liabilities, also referred to as accrued expenses, are expenses that businesses have incurred, but haven’t yet been billed for. These expenses are listed on the balance sheet as a current liability, until they’re reversed and eliminated from the balance sheet entirely. Accrued liabilities are reported with accrual accounting to give you a clearer picture of the financial position of the company, regardless of whether a cash transaction has taken place. Broadly speaking, there are two types of accrued liabilities:
Routine/recurring – This refers to a normal operating expense which your business is required to pay periodically. For example, accrued wages.
Infrequent/non-routine – This refers to expenses that do not occur as part of your business’s normal operations. For example, one-off purchases for which you haven’t received a bill.
The term “accrued” means “accumulate” or “increase.” As such, accrued liabilities essentially means that the number of unpaid bills issued to your company is increasing. Per the accrual basis of accounting, as opposed to the cash basis method, expenses need to be recognised as soon as they’re incurred, not when they’re paid.
Accrued liabilities examples
There is a broad range of accrued liabilities examples that may paint a clearer picture of these types of expenses. For example, think about wages that have been incurred but haven’t yet been paid. Although they’ve been accrued, the payment hasn’t actually been issued, making them an accrued liability. Utilities that your company has used but not yet paid for also count as accrued liabilities, as do services/goods that you’ve received and used but haven’t been billed for. Some of the other common accrued liabilities examples include:
Accrued advertising/promotion costs
Accrued interest on loans
Accrued product/software warranty costs
Bottom line: accrued liabilities are amounts that your business will owe in the future.
What’s the difference between accrued liabilities and accounts payable?
Accounts payable (AP) refers to the money that your business owes to third parties, such as suppliers or vendors. Typically, they’re short-term debts, and because they’re generally expected to be paid within one year of the transaction (if not before), accounts payable are considered current liabilities. As you can see, accounts payable and accrued liabilities might sound similar. However, there’s one clear difference between them that it’s important to understand.
Most significantly, accrued liabilities haven’t been billed. Accounts payable have. This means that, in some cases, accrued liabilities will be estimates of amounts owed by your business which will be adjusted later, when the exact amounts are known. When it comes to the difference between accrued liabilities and accounts payable, it’s also worth remembering that accrued liabilities also represent regular expenses that don’t require billing (i.e., payroll).
Accrued liabilities on the balance sheet
Usually, the journal entry for accrued liabilities will be a debit to an expense account and a credit to an accrued liabilities account. Then, at the start of the next accounting period, the entry will be reversed. This provides you with a net-zero entry, meaning that the expense recognition shifts forward to the appropriate accounting period.
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