Loading the player...

What is an 'Accrued Liability'

An accrued liability is an expense that a business has incurred but has not yet paid. A company can accrue liabilities for any number of obligations, and the accruals can be recorded as either short-term or long-term liabilities on a company's balance sheet. Payroll taxes, including Social Security, Medicare and federal unemployment taxes are liabilities that can be accrued periodically in preparation for payment before the taxes are due.

BREAKING DOWN 'Accrued Liability'

An accrued liability is a financial obligation a company incurs during a given period but has not yet paid for in that period. Although the cash flow has yet to occur, the company must still pay for the benefit received. Accrued liabilities only exist when using an accrual method of accounting. The other alternative – the cash method – does not accrue liabilities. Accrued liabilities are entered into the financial records during one period and are typically reversed in the next when paid. This will allow for the actual expense to be recorded at the accurate dollar amount when payment is made in full.

Purpose of Accrued Liability

The concept of an accrued liability relates to timing and the matching principle. Under accrual accounting, all expenses are to be recorded in financial statements in the period in which they are incurred, which may differ from the period in which they are paid. Expenses are recorded in the same period when related revenues are reported to provide financial statement users with accurate information regarding the costs required to generate revenue.

Situations Causing Accrued Liabilities

Accrued liabilities arise due to events that occur during the normal course of business. A company that purchased goods or services on a deferred payment plan will accrue liabilities, because the obligation to pay in the future exists. Employees may have performed work but have not yet received wages. Interest on loans may be accrued if interest fees have been incurred since the previous loan payment. Taxes owed to governments may be accrued because they may not be due until the next tax reporting period.

Example of Accrued Liability

At the end of a calendar year, salary and benefits must be recorded in the appropriate year, regardless of when the pay period ends and when paychecks are distributed. For example, a two-week pay period may extend from December 25 to January 7. Although the salaries and benefits will not be distributed until January, there is still one full week of expenses relating to December. Therefore, the salaries, benefits and taxes incurred from December 25 to December 31 are accrued liabilities. In the financial records, expenses will be debited to reflect an increase in the expenses. Meanwhile, various liabilities will be credited to report the increase in obligations at the end of the year.

RELATED TERMS
  1. Accrued Revenue

    Accrued revenue - a balance sheet asset - is revenue that has ...
  2. Accrued Interest

    Accrued interest is debt interest that has not yet been collected. ...
  3. Accrued Income

    Income that is earned in a fund or by company by providing a ...
  4. Total Liabilities

    Total liabilities are the aggregate of all debts an individual ...
  5. Accrued Monthly Benefit

    An accrued monthly benefit is the earned pension benefit that ...
  6. Accrued Interest Adjustment

    Accrued interest adjustment is the extra amount of interest that ...
Related Articles
  1. Taxes

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
  2. Investing

    Understanding Coca-Cola's Capital Structure (KO)

    Since the crisis of 2008 and the implementation of an accommodative monetary policy by the Fed, Coca-Cola's capital structure has significantly shifted.
  3. Investing

    Understanding The Federal Reserve Balance Sheet

    We are all connected to the Fed's balance sheet, and the currency notes that we hold are its liabilities.
  4. Investing

    Evaluating Your Personal Financial Statement

    Determine your net worth by making your own cash flow statement and balance sheet.
  5. Investing

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  6. Insights

    Limited Liability Partnership (LLP): The Basics

    Limited liability partnerships (LLPs) are a flexible, legal and tax entity that allows partners to benefit from economies of scale while also reducing their liability.
RELATED FAQS
  1. What Are Some Examples of Current Liabilities?

    Look at some common examples of current liabilities a company may owe within a year or less in order to accurately assess ... Read Answer >>
  2. What does it mean to capitalize accrued interest?

    Understand what it means when a company capitalizes accrued interest. Learn what constitutes accrued interest and what constitutes ... Read Answer >>
  3. What does it mean when interest 'accrues daily?'

    Learn what it means when an interest-bearing account accrues interest daily and how different compounding periods change ... Read Answer >>
  4. When are expenses and revenues counted in accrual accounting?

    Take an in-depth look at the treatment of revenues and expenses within the accrual method of accounting and learn why many ... Read Answer >>
  5. What items on the balance sheet are most important in fundamental analysis?

    Read about which balance sheet items are considered most important for fundamental analysis, including cash, current liabilities ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center