Accrued Liability: Definition, Insights & FAQs
An accrued liability refers to an expense that a company incurs for goods or services that it has received but not yet paid for.
Accrued Liability Explained
In terms of accounting, an accrued liability refers to an obligation (expense) that a company incurs for goods or services that it has received but not yet paid for.
This is part and parcel of the accrual accounting method, which records financial transactions when they are incurred rather than when cash changes hands.
Let’s say you own a business and have utilized some consulting services. The consultants have sent you an invoice payable within 30 days.
Even though no cash has left your account yet, you’ve incurred an obligation to pay. This obligation becomes an accrued liability on your balance sheet.
Why It’s Important: Accrued liabilities provide a more complete picture of a company’s financial health. Ignoring or underestimating them could lead to misleading financial statements, causing erroneous business decisions.
- Accrued liabilities are often tied to expense recognition, ensuring that expenses align with the revenues they help to generate.
- Accrued liabilities appear on the balance sheet, under the liabilities section, usually under “current liabilities” since they are often short-term in nature.
- Understanding accrued liabilities helps in better cash flow management, preparing businesses for future cash outflows.
Examples Of Accrued Liability
Utilities: If your electric bill arrives on the 5th of each month but you pay it on the 10th, the amount due becomes an accrued liability from the 5th to the 10th.
Employee Salaries: If your employees are paid on the 1st of the month for services rendered the previous month, the salaries become an accrued liability until they’re paid.
Supplier Invoices: When a supplier delivers goods but their payment is due in 30 days, the invoice amount is an accrued liability.
Accrued Liability vs. Accounts Payable
|Criteria||Accrued Liability||Accounts Payable|
|Definition||An obligation incurred for goods or services received but not yet paid for.||An obligation to pay off a short-term debt to creditors or suppliers.|
|Documentation||May not always have an invoice or formal agreement.||Usually involves an invoice or formal agreement.|
|Recognition||Recognized when goods or services are received.||Recognized when an invoice is received.|
|Timeframe||Typically short-term, but could be long-term.||Generally short-term liabilities.|
|Financial Statements||Appears on the balance sheet under current liabilities.||Also appears on the balance sheet under current liabilities.|
Is accrued liability a current or long-term liability?
Most accrued liabilities are considered current liabilities as they are due within a year.
How to record accrued liabilities?
Accrued liabilities are typically recorded via adjusting journal entries at the end of an accounting period.
What happens if accrued liabilities are ignored?
Ignoring accrued liabilities can distort financial statements, resulting in misleading assessments of a company’s financial condition.