Accrued Liability
Candlefocus EditorWhen accounting for accrued liabilities, businesses use an accrual method of accounting. This involves recording the accrued liability in an expense account with a debit entry, while also recording the same amount in a separate accrued liability account with a credit entry. Upon a payment being made for the accrued liability, the entry for the expense account is reversed with a credit entry, while a debit entry is made in the accrued liability account.
An example of an accrued liability can be seen with payroll and payroll taxes. When wages are earned by employees and recorded in the payroll register, an accrued liability is created for any amount of wages that has not yet been paid. This liability does not become a payable until the payroll is processed, at which point it is recorded as an actual accounts payable.
Accrued liabilities can also take the form of interest payments. When using accrual-based accounting, all accrued interest between payments of a loan is recorded in the liability account as an accrued interest obligation to be paid. Upon the payment of the interest portion, the entry is reversed, reducing the accrued liability and increasing the cash held in the financial accounts.
Accrued liabilities form a vital part of any business’s financial accounting. Even though they may not necessarily result in a direct payment or debt obligation, they do represent a form of incurred expense that must be accounted for as part of any company’s books. In addition to serving as a means to ensure that a company’s financial accounts are correctly balanced, when these liabilities are properly accounted for, it can also represent a means of saving money wherever possible. By recording accrued liabilities in a timely manner and making payments in a timely manner, businesses can take advantage of the timing differences in when the expense occurs versus when the payment is made, helping to minimize expenses and maximize cash flow.