Accrued Liabilities can be defined as an obligation that a corporation has assumed in the case of the absence of a confirming document.
This is an internally created memorandum that is prepared in the case where the corporation is yet to receive a confirmation, like an invoice, from the supplier or the biller, but they have already consumed the goods or services. Subsequently, in this case, the accountants are supposed to record it as an accrued liability.
As mentioned earlier, it can be seen that Accrued Liability is regarded as an expense that needs to be paid for by the company but has not been billed for.
According to the matching principle, and the principle of relevance, it only makes sense to record the current year’s expenses in the current year’s financial records. There are a number of examples of such transactions, some of which are mentioned below:
- During a normal course of the business, there are wages and salaries that are incurred over a certain time frame. As a matter of fact, it can be seen that these wages and salaries need to be paid for, but there is not a proper invoice regarding the hours they have been billed. Therefore, this is going to be treated as an Accrued Liability.
- In the same manner, taxes and interest rate payments carried forward from one year to another are also treated as a Current Liability.
Speaking of the treatment of an accrued liability, it is calculated on the basis of the quantity information in the receiving log, as well as the pricing information mentioned on the authorized purchase order.
The main rationale behind this particular entry is to ensure that the expense of obligation is duly recorded in the period where it is initially incurred.
As far as accrued liabilities are concerned, they are expenses that have already been incurred and need to be paid for. Therefore, under the matching principle, they are supposed to be treated as current liabilities to denote that these are liabilities that need to be paid in the current time period.
Hence, it can be seen that accrued liabilities are placed in the Balance Sheet (or Statement of Financial Position) of the company, in the Current Liabilities section, unless they have been paid for. After payment, they are then eliminated from the Balance Sheet. The reason behind their classification is primarily on the grounds of the debts that need to be honored within a cycle of 12 months.
To conclude the points mentioned above, it can be seen that accrued liabilities are also referred to as accrued expenses. Examples include accrued salaries, wages, interest and tax payments and so forth. Therefore, these expenses are mainly clubbed in order to simplify the presentation process.
Regardless of the fact that they should be treated as Accrued Liability, yet it can be seen that they are reported as Current Liability because of their very nature.
In the same manner, it can further be noted that these liabilities are short term, and need to be settled at a time interval of a few months, because of the fact that they are expenses that are incurred in the day to day running of the business.