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Accrued liabilities

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Accrued liabilities

Accrued liabilities are liabilities that reflect expenses on the income statement that have not been paid or logged under accounts payable during an accounting period; in other words, obligations for goods and services provided to a company for which invoices have not yet been received. Examples would include accrued wages payable, accrued sales tax payable, and accrued rent payable.

There are two general types of Accrued Liabilities:

  • Routine and recurring
  • Infrequent or non-routine

Example: Accrued Wages Payable

Most companies pay their employees on a predetermined schedule. Let's say that the "Imaginary company Ltd." pays its employees each Friday for the hours worked that week.

Because wages are accrued for an entire week before they are paid, wages paid on Friday June 5 are compensation for the week ended June 5. If the total wages for the 4 Fridays in June are $1000.00 ($250.00 per week or $50.00 per day) "Imaginary company Ltd." makes routine entries for wage payments at the end of each week. As the company pays wages it increases 'Wage Expense' and decreases 'Cash'. In this example "Imaginary company Ltd." would pay wages on the 5th, 12th, 19th, and 26 June. Assuming that the company prepares Financial statements each month, they owe an additional $200.00 in wages for the last four workdays in June (the 27th, 28th, 29th & 30th). The company will not pay these wages until Friday the 3rd of July; to make sure the company's report remains correct an adjustment must be made.

Wage Expense                 $1000.00
Cash                                  $1000.00
Wage Expense                 $200.00
Accrued Wages Payable                 $200.00

If the company does not record the 2nd transaction, both Expenses and Liabilities are understated. This will make the company's Income appear higher than it really is, which can have very serious consequences.

Accrued liabilities is the direct opposite of prepaid expense. See Matching principle.

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