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A company's accrued liabilities are costs it incurred during a given time period but hasn't yet paid for. At the conclusion of an accounting period, they are revised and listed as current liabilities on the balance sheet.
Only when accounting is done using the accrual method, which adheres to the matching principle of recording expenses at the same time as corresponding receipts, do accrued liabilities exist.
There are two different categories of accrued liabilities: regular/recurring and irregular/non-regular. Regularly occurring costs associated with daily business operations, such as salaries, interest, taxes, and utility costs, are known as routine accrued liabilities. For example, lawsuits, bonuses, or repairs, infrequent incurred liabilities are costs that sporadically or unpredictably appear.
A company must create a journal entry that credits an accrued liability account and debits an expense account in order to report an accrued liability. For example, if a company incurs $10,000 of interest expense in December but will not pay it until January, it must record the following entry in December:
Debit Interest Expense 10,000
Credit Accrued Interest Payable 10,000
This entry increases the interest expense and the accrued interest payable on the income statement and balance sheet, respectively. In January, when the company pays the interest, it must reverse the accrual entry by debiting the accrued interest payable and crediting cash:
Debit Accrued Interest Payable 10,000
Credit Cash 10,000
This entry decreases the accrued interest payable and cash on the balance sheet.
Accrued liabilities are important for measuring the financial performance and position of a business. They ensure that expenses are recognized in the same period as the revenues they help generate, which provides a more accurate picture of profitability. They also reflect the obligations that a business has to pay in the future, which affects its liquidity and solvency.
