For example, if a company orders goods from a supplier in January but does not receive the goods or pay for them until February, the expense will be recorded in the company's January accounts. This means that the expense is recorded in the period in which it is incurred, regardless of when the bill is received or paid.

Similarly, if a company employs staff but does not pay them until the following month, the company will have incurred an accrued expense in the form of wages payable.Īccrued expenses are recorded in the company's accounts using accrual accounting. For example, if a company orders goods from a supplier but does not receive the goods until the following month, the company will have incurred an accrued expense in the form of the cost of the goods. Accrued expenses are common in businesses, and can occur for a variety of reasons. This means that the expense has been recorded in the company's books, but the bill has not yet been received or paid. Thank you for reading CFI’s explanation of Accrued Liability.An accrued expense is an expense that has been incurred but not yet paid. The purpose of accrued liabilities is to create a timeline of financial events.

The net effect on financial statements is an increase in the expense account and a decrease in the cash account. As you can see, the accrued liabilities account is net zero following the payment. They receive the bill on January 10 th and pay the same day.Ībove are the journal entries for December 31 st and January 10 th. However, the supplier has yet to bill them. Accrued services: A supplier has provided a service but has yet to bill the customerĬompany ABC has received product from their supplier on December 31 st, costing $500.Accrued wages: Employees have not been paid for work completed because their payroll period falls after the reporting date.Accrued interest expense: When a company owes interest on a loan but has yet to be billed by the lender.At such a point, the accrued liability account will be completely removed from the books. Once the payment is made, accrued liabilities are debited, and cash is credited. The journal entry is typically a credit to accrued liabilities and a debit to the corresponding expense account. However, if they were to receive the shipment and the bill before the end of the period, they would record an accounts payable. Accrued liabilities may not have been billed either because they are a regular expense that doesn’t require billing (i.e., payroll), or because the company hasn’t received a bill from the supplier.įor example, if a company has received a shipment from a supplier and has yet to receive a bill, they will record an accrued liability. However, the difference between them is that accrued liabilities have not been billed, while accounts payable have. Accounts PayableĪccrued liabilities and accounts payable are both current liabilities. As the event isn’t recurring, it is considered an infrequent/non-routine accrued liability. An example is a one-off purchase from a supplier where a bill is not immediately received. Infrequent/Non-Routine is the opposite and does not occur as a normal operational part of the business. An example would be accrued wages, as a company knows they have to periodically pay their employees. Routine/Recurring occurs as a normal operational expense of the business. There are two types of accrued liabilities: routine or recurring and infrequent or non-routine. Accrued liabilities can also be thought of as the opposite of prepaid expenses. When an accrued liability is paid for, the balance sheet side is reversed, leaving a net zero effect on the account. Under the matching principle, all expenses need to be recorded in the period they are incurred to accurately reflect financial performance. Recording accrued liabilities is part of the matching accounting principle.

They are recorded to better represent the financial position of the company regardless if a cash transaction has occurred. Examples of accrued liabilities include accrued interest expense, accrued wages, and accrued services.Īccrued liabilities are expenses that have yet to be paid for by a company.There are two types of accrued liabilities: routine/recurring and infrequent/non-routine.An accrued liability represents an expense a business has incurred during a specific period but has yet to be billed for.