Accrued Liabilities

Understanding Accrued Liabilities

Accrued liabilities refer to a business’s obligations when it purchases goods and services on credit without receiving immediate invoices.

These liabilities represent amounts that the business is expected to pay.

When goods or services are purchased on credit, the business’s bank or cash accounts are not affected.

Instead, the balance is recorded in the trade payables account, which is reflected in the balance sheet.

The purchase account is debited, similar to a cash purchase.

Accrued Liabilities and the Matching Concept

Accrued liabilities can also arise from accrued expenses, such as outstanding electricity bills.

In such cases, the expense is recorded in the accounting period in which it was incurred, rather than the period in which it was paid.

These transactions are typically recorded in the current liabilities section of the balance sheet, and the balance is eventually written off when the company makes payments for the purchased goods or services.

These transactions are recorded when the goods or services are received, as the company has already benefited from the purchase.

This follows the accounting principle of accruals, which emphasizes the matching concept.

Writing Off Accrued Liabilities

Accrued liabilities are written off when the business makes payments for the accrued balances.

The amount is debited from the bank or cash balance, reducing the liability account’s balance.

Types of Accrued Liabilities

There are two main types of accrued liabilities that a business can encounter:

Routine Accrued Liabilities:

These liabilities arise from a company’s day-to-day activities, such as the purchase of raw materials.

They occur multiple times within a year and are recorded in the trade payables account or other payable accounts.

Non-routine Accrued Liabilities:

Non-routine liabilities occur on rare occasions and are related to the non-operating duties of the company.