Definition: 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.
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.
Most accrued liabilities are created as reversing accruals, 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.
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.
Examples of accrued liabilities are:
- Accrued interest expense. 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. A business incurs a liability to pay several types of payroll taxes when it pays compensation to its employees.
- Accrued pension liability. A company incurs a liability to pay its employees at some point in the future for benefits earned under a pension plan.
- Accrued services. A supplier provides services to a company, but has not billed the company by the end of an accounting period, because it takes time to compile billings from the time sheets of its employees.
- Accrued wages. 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.