Accrued Liability Definition

Accurately calculating a business’s expenses can be an important part of measuring its financial health. Expenses that have been incurred but not yet paid should usually be factored into this metric. In accounting this is known as accrued liabilities or accrued liabilities, these unpaid expenses are part of the financial outlook of the business for a certain period of time.

In this article, we define what an accrued liability is and provide some examples to help you with your own accounting process.

What is an accrued liability?

An accrued liability or accrued liability is an expense that a business has to pay or will expect to pay within a certain accounting period, usually one month, that has not been paid.

The term is mostly used only in businesses or organizations that use a form of bookkeeping called accrual accounting.

In this form of accounting, expenses are entered into the company’s records when they are incurred, regardless of when they are actually paid. They are then deducted from the general ledger, or transaction records when the company makes a payment.

For example, if a bill is due on the 25th day of each month, but the check is not cleared until the second day of the following month, it will still be counted on the due date in accrual accounting.

These financial records are correct although the actual payments will not appear in the general ledger until later. This differs from cash-based accounting, where expenses are recorded when they are officially paid.

Using accrued liabilities can be an effective way to measure a company’s financial liabilities, although it can be more challenging to determine how much cash is in a business.

Different types of accrued liabilities in a business

Accrued liabilities usually fall into one of two categories: routine or recurring accrued liabilities and infrequent or non-routine accrued liabilities.

Knowing the difference between these two types of expenses can help you keep accurate records and anticipate future payments and expenses.

To help you better manage your own balance sheet, here are definitions of each type of accrued liability:

1. Routine or recurring accrual liabilities

Recurring accrued liabilities, also known as “recurring accrued liabilities”, are expenses that are expected to be incurred as part of the day-to-day business.

Wages of employees, for example, may fall into this category because they may actually be paid after they are accounted for.

It is often appropriate to use recurring accrual liabilities to help make financial forecasts for a business or organization.

2. Infrequent or non-routine accrued liabilities

Infrequent accrued liabilities, or “non-routine accrued liabilities”, are expenses that a business does not expect to accrue.

Late payments on invoices, for example, can be classified as a type of accrued expense because they are not part of the day-to-day business and are generally unpredictable.

Consider paying attention to potential non-routine accrued liabilities when determining how much liquidity should be available.

Difference between accrued liabilities and accounts payable

Accrued liabilities and accounts payable work the same way because they both account for current expenses, usually in the current month.

They differ in that accrued liabilities have not been billed, whereas accounts payable have been collected. For example, payroll is usually considered an accrued liability because it does not involve collection.

Accounting for materials received but not invoiced is a process that also usually fits the description of accrued liabilities.

Examples of accrued liabilities

Here are some other examples of accrued obligations to help you with your own accounting:

1. Payroll

Wages and benefits owed to employees are usually considered accrued liabilities. This is because employees usually do the work before receiving payment.

Businesses often take payroll obligations into account before sending payments to their employees.

2. Pension and other benefits

When an employee receives a pension or other payment that was earned before distribution, this payment is an accrued liability.

This type of payment can actually be sent over more than one accounting period far from when the employee received it.

3. Management bonuses

Like payroll, management bonuses are often calculated before being sent to the person who earns them.

This is especially true if a manager earns bonuses during one accounting period and receives payments in the next—for example when the manager’s September performance earned them bonuses paid in October.

3. Year-end liabilities

Bills and invoices that occur in the last weeks of December are often not paid until the following year. Because these expenses are recorded in one accounting period and paid in another, they have often been considered an accrued liability.

4. Multiple advertisements and promotions

Advertising and promotion costs are accrued liabilities if recorded in the balance sheet before collection occurs.

For example, if your company has a pre-engagement agreement with a social media marketing company, you can estimate costs for a typical one-month period and record those costs for the month in which the engagement occurred.

Actual payments may occur over the next month or later.

5. Requirements

Some utilities are accrued liabilities because they are billed during the accounting period after the service has been rendered. For example, the electricity used to heat an office in one month is totaled and billed the following month.

Since expenses are incurred in one month and billed and paid in the following month, this fits the definition of an accrued liability.

Other metering utilities such as gas and water may also fit into this category. However, prepaid utilities such as telephone service generally do not count as accrued liabilities.

6. Deferred payment

Deferred payment agreements can often be considered an accrued liability as well. Using a store business credit option to make a material purchase, for example, is an accrued liability because the fee must be paid later.

7. Interest on the loan

Interest on the loan is usually paid after the loan period itself is recorded on the company’s balance sheet. For this reason, it is an accrued obligation.

8. Tax

Tax payments, when paid after they are recorded in a company’s general ledger, can sometimes be called accrued liabilities. Whether this is true in any given situation often depends on the particular payment schedule.

How does accrual liability work in accounting?

Your business balance sheet records the assets of your business on the one hand, and on the other, the balance sheet shows the liabilities and owner’s equity. Accrued liabilities are included on the right side of the balance sheet.

Short-term accrued liabilities (which are expected to be paid in less than one year) are shown before long-term liabilities.

Accrued liabilities only apply to companies that use the accrual accounting method. That’s because only accrual accounting records transactions as they occur—even if the money hasn’t changed hands.

If you don’t use accrual accounting, you won’t account for expenses until you pay them. That means you won’t have any accrued obligations.

When something is “accumulated”, it means it is accumulated. In accounting terms, if liability is accrued, it means that the obligation must be paid at some future date.

So accrued liabilities accumulate over time, and they are paid at a certain time.