Accrued Liability

Accrued Liability: Overview, Types, and Examples

Key takeaways

• An accrued liability (or accrued expense) is an expense a business has incurred but not yet paid or billed.
• Accrued liabilities exist only under the accrual method of accounting and are recorded to match expenses to the period in which they are incurred.
• Typical examples include wages, payroll taxes, interest, and utilities received but not yet billed.
• Journal entry on accrual: debit expense, credit accrued liability. When paid: debit accrued liability, credit cash.

What is an accrued liability?

An accrued liability is a financial obligation a company recognizes for goods or services already received but not yet paid for or invoiced by the end of an accounting period. These items are recorded on the balance sheet—usually as current liabilities—to ensure expenses are reported in the same period as the related revenues (the matching principle).

Accrued liabilities do not arise under the cash basis of accounting because cash must change hands before an expense is recorded.

Types of accrued liabilities

• Routine (recurring) accrued liabilities: Regular operating expenses such as accrued interest, routine payroll and payroll taxes, or monthly utilities that are regularly incurred.
• Non‑routine (infrequent) accrued liabilities: One‑time or unusual expenses that are incurred but not regularly part of operations, such as a legal settlement or an unexpected repair invoice received after period‑end.

Journal entries

1. To record the accrual:
2. Debit: Expense account
3. Credit: Accrued liability (a current liability)
4. When the company pays:
5. Debit: Accrued liability
6. Credit: Cash

Recording the accrual ensures the expense appears in the correct accounting period; payment later eliminates the liability.

When accrued liabilities occur

Accrued liabilities arise whenever the company has received a benefit before paying for it. Common situations:
* Employees work during a pay period that crosses a reporting date (e.g., pay period from Dec. 25–Jan. 7: the wages for Dec. 25–31 are accrued).
* Interest accumulates on loans between payment dates.
* Taxes or government fees are incurred but not yet due.
* Goods or services are received near period‑end, but invoices arrive later.

Accrued liabilities vs. accounts payable

• Accrued liabilities: Expenses incurred but not yet billed or recorded; no vendor invoice exists at period‑end (e.g., earned wages, utilities not yet invoiced).
• Accounts payable: Obligations documented by vendor invoices received and entered into the accounts payable system.

Both appear as current liabilities on the balance sheet, but accounts payable typically have specific invoices and payment terms (e.g., 30–60 days), while accrued liabilities are estimated and recorded to reflect costs incurred.

Examples

• Wage expenses for work performed before pay date but after reporting date.
• Payroll taxes (Social Security, Medicare, unemployment) accrued before they’re remitted.
• Interest expense on loans that accrues between scheduled payments.
• Utility bills or contractor services received but not yet invoiced at period‑end.

Why accrue liabilities?

Accruing liabilities provides more accurate financial statements by matching expenses to the period when they were incurred. This improves comparability and decision‑making for investors, lenders, and management by reflecting the company’s true obligations and performance for each reporting period.

Conclusion

Accrued liabilities are essential components of accrual accounting. They ensure expenses are recorded in the proper period even when payment or billing occurs later, preserving the integrity of the matching principle and providing a clearer picture of a company’s financial position.