Accrued liabilities
Encyclopedia
Accrued liabilities are liabilities which have occurred, but 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 invoice
s 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:
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 $100.00 in wages for the last two workdays in June (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 $100.00
Accrued Wages Payable $100.00
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
.
Accounts payable
Accounts payable is a file or account sub-ledger that records amounts that a person or company owes to suppliers, but has not paid yet , sometimes referred as trade payables. When an invoice is received, it is added to the file, and then removed when it is paid...
during an accounting period; in other words, obligations for goods and services provided to a company for which invoice
Invoice
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
s 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 $100.00 in wages for the last two workdays in June (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 $100.00
Accrued Wages Payable $100.00
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
Matching principle
The matching principle is a culmination of accrual accounting and the revenue recognition principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, expenses are recognized when obligations are incurred The matching principle...
.