Accrued liability is treated as an expense that we use for our purpose but we do not pay. If we talk about the accrued expense, it would be an expense for us which we borrow from someone such as a lender, bank or financial institutions etc.
In simple words, we can describe this concept in a few words, it is an expense which is incurred by us but not yet paid. This is our expense in a way when we borrow but when we don’t pay it, it becomes our liability.
- When we create an expense, it is debited
- When we clear the expense, it is credit
So an accrued liability always records in the accrual accounting because at the end of the year, a company analyses the performance according to their expenses and accrued liability. It usually records on the side of current liabilities.
Types of accrued liabilities
- Routine or recurring liabilities: This is the part of the business expenditure that the company has to fill or pay on time as a periodic or specific period of time. For example, Accrued wages, Accrued salary etc.
- Infrequent or non-routine: This is not a part of the business expenditure which means it does not contain any business operations and do not pay regularly on fixed time. For example: medical expenses etc.
Some examples of accrued liability
- Accrued interest: We charge accrued interest as a current asset and current liability. Two entries have passed and it’s done according to the situation. For example: As if you have taken a loan of 1,00,000 from the bank at the rate of 10%. To receive the amount of the loan, that will be an accrued interest but if you don’t pay it then it becomes an accrued liability. This loan is not necessary if you take it from the bank itself, but you can also take it from any lender, landlord or any other loan provider.
- Accrued wages or salary: This is the major part of the business expense because it is a compulsory expense that every company must pay to the employees. But sometimes a company is working with employees and takes full benefits from employees but doesn’t pay them on time so it is treated as an accrued liability and recorded in a credit account.
- Accrued services: This services like product or services taken by the company from the goods seller or suppliers at the rate of interest. So if a company gets benefits of these goods but doesn’t pay them for goods or services it is considered as an accrued liability.
Difference between accrued interest and account payable
Many people have so much confusion between the concept of accrued interest and account payable so lets overcome these confusion and clear this concept.
Like we mentioned above that the accrued liabilities is the expense that we use but do not pay for it. On the other side, an account payable is what we have to pay on time in a particular period of time. It is a regular expense, it doesn’t count in non-routine expenses and it does not require any billing form because the supplier doesn’t give any bill for goods or services. In simple words, if the company borrows any goods from a supplier but does not make the payment at that time, then it is transferred to the accrued liability.
For example, Mr.X purchase a machine at RS.1,00,000 from supplier but doesn’t make at that time so that amount will record in current liability at the credit side.If borrower pay the half of the amount so that half amount will be recorded in a current asset in the debit side because debit side always decrease the balance of accounts payable and credit side always increase account payable.
So these are some examples from which you must have cleared the concept of accrued liability.
Read more…