An Accrued Liability can be defined as an obligation that an entity has realized and subsequently accounted for, in the case where the supplier is yet to provide with a confirmation. The confirmation or a confirming document is mostly a supplier invoice.
For example, if a company has consumed goods or services that have been provided by a supplier, and are yet to receive an invoice, the amount will be considered as an accrued liability at end of the given period.
The amount is mostly calculated based on the pricing information that can be accessed via the purchase order. The main rationale behind this accrued liability is to record an expense or an obligation in the period where it was initially incurred.
Journal Entry and Accounting Treatment
The journal entry for an accrued liability is as follows:
Debit – Expense account
Credit – Accrued Liabilities Account
The main reason behind debiting the expense account is the fact that according to the realization principle, expenses should be recorded in the period where they are incurred.
On the other hand, Accrued Liability is credited because this is something that is payable by the company in exchange for goods and services it has used over the course of time. In the subsequent account period, this entry is reversed.
Accrued Liabilities are treated as reversing accruals. It appears in the Balance Sheet, mostly under the Current Liabilities section, because of the fact that this is an expense that has to be paid in the coming few months. However, once this amount has been paid, it is then removed from the Balance Sheet altogether.
Examples of Accrued Liability
As far as accrued liabilities are concerned, it can be seen that the concept of accrued liability can further be explained using the following concepts.
Firstly, there is an accrued interest expense. In the case where company loan is outstanding, and the company owes interest (finance charges) which are yet to be billed by the lender, it will be treated as an Accrued Liability.
Similarly, the company can also have accrued payroll taxes. In the case where the company is not properly billed for the tax amount, it is treated as an Accrued Liability.
Therefore, it can be concluded that Accrued Liabilities are mainly liabilities that have been incurred, but have not yet been paid, or accounted for. Hence, in this regard, they are supposed to be treated under Current Liabilities in the Balance Sheet.
It is important to record accrued liabilities because it gives a correct representation about the expenses and liabilities that the company has so that there is clarity about the overall amount that needs to be paid to the creditors in the longer run.
Accrued Liability is mainly a temporary account, and therefore, it is only created for the time being where the organization is waiting to receive a proper billed invoice. After its receipt, it is then reversed, and the amount is then recorded as a Current Liability.