Accrued Liability/Accrued expenses
The accrued liability is an expense that has been incurred but not yet paid. The term accrued is used as per the approach as defined by the accrual system of accounting.
This approach defines that all the expenses and income shall be recognized in the period in which they are incurred and not when they are paid.
Accrued liabilities can also be called accrued expenses. Accrued liabilities shall be recognized at the end of each accounting period.
Examples of accrued liability include:
- Taxes incurred, for which no invoice from a government entity has yet been received
- Utilities used for the month but an invoice has not yet been received before the end of the period
- Wages that are incurred but payments have yet to be made to employees
- Interest on loans, for which no lender invoice has yet been received
Accrued means to increase or accumulate. When the company accrues expenses, it would mean that the portion of unpaid bills is increasing.
Hence, applying the approach of the accrual method of accounting, expenses are to be recognized when they are incurred and not when they are paid.
Accounts Payable
Accounts payable are the expenses recognized on the liability side when purchases are made on credit. These are ongoing company expenses and are short term debts to be paid within 1 year so as to avoid default.
Accounts payable is the total amount of short-term obligations or debt a company has to pay to its creditors for goods or services bought on credit.
Accounting treatment in Financial Statements
Expenses are shown in the income statement on the debit side if the traditional format is used. If these expenses are unpaid, these become accrued liability to be shown on the current liability side of the balance sheet.
| Sales | XX |
| Less: Cost of goods sold (expense) | X |
| Gross profit | XX |
| Less: operating expenses | |
| Administrative expenses | X |
| Utilities expenses etc | X |
| Operating income | XX |
| Less: Non-operating expense | X |
| Net income | XXX |
Accounts payable fall under current liabilities section which falls under liabilities part of Balance sheet as shown below:
| Liabilities and capital | Amount ($) | Assets | Amount ($) |
| Shareholders’ equity | X | Non – Current Assets | X |
| Non-current liabilities | X | ||
| Current Assets | X | ||
| Current Liabilities | X | ||
| Accounts Payable | X | ||
| Other current Liabilities Salaries payable (accrued liabilities) Wages payable (accrued liabilities) | X | ||
| XXX | XXX |
Accrued Liability Vs Accounts Payable
Accounts payable is the result of purchases made on credit. On the other hand, accrued expenses are the total liability that is payable for goods and services that have been consumed by the company or received but have not yet been billed.
The classification of both the liabilities are the same and they both are current liabilities. The only difference is in their meaning.
The accrued liability is simply expenses accrued but unpaid while accounts payable represents the specific purchases made and unpaid for.
Let’s take an example:
Davidson Company pays salaries to its employees on the first day of the following month for the services received in the prior month.
So, an employee that worked in the company all of June will be paid in July. At the end of the year on December 31st, if the company’s income statement recognizes only salary payments that have been made, the accrued expenses from the employees’ services for December will be omitted.
By contrast, Davidson’s company makes purchases worth USD 1 million on December 1 with 60 days payment terms.
Now at the end of the current financial year, the company shall recognize USD 1 million as accounts payable.
Hence, both are different by meaning and by origin although the classification in the balance sheet is the same.