• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Penpoin

Better knowledge. Sharper Insight.

  • Management
  • Economics
  • Finance
Finance

Accrued liabilities

Updated on April 11, 2020 · By Ahmad Nasrudin

Accrued liabilities
You are here: Home / Finance / Accrued liabilities

Accrued liabilities, such as trade payables, work in reverse with trade receivables. They become a source of liquidity if the company can extend it. But, if many of them are due at the same time, it could drain the company’s cash and could lead to liquidity problems.

Advertisement

Definition of accrued liabilities

Accrued liabilities are unpaid expenses that have already been incurred. The most common example is accrued expenses, i.e., amounts owed by companies to suppliers for purchasing inputs on credit. The company has received goods or services but has not yet paid for them. The company records them in the liabilities of the balance sheet, which can appear in current liabilities or non-current liabilities.

Some examples of accrued liabilities are:

  • Purchase of raw materials on credit (accrued expenses)
  • Accrued advertising and promotional expenses
  • Unpaid salary tax
  • Accrued employee salaries and benefits
  • Accrued interest on loan debt
  • Accrued warranty expense

How companies report accrued liabilities in the balance sheet

The company records accrued liabilities in current liabilities or non-current liabilities, depending on when they are due. Accrual expenses such as purchases of raw materials on credit appear in current liabilities because payments are usually scheduled within one year from the date of the transaction. While some other accounts appear as non-current liabilities because they have a maturity of more than one year.

Accrued liabilities arise when companies adopt the accrual accounting method. But, for the cash method, this account won’t exist because the company records expenses when it has paid in cash.

The accrual method allows a company to report expenses even if it has not been paid in cash. When the company has received goods or services, it records expenses in the income statement (shareholders’ equity decreases). At the same time, it also recognizes accrued liabilities. Because stockholders’ equity decreases and liabilities rise at an equivalent nominal, the accounting equation remains balanced.

Let’s take a simple example.

In November, the company buys goods from suppliers for the amount of Rp100 and will pay them in January next year. For financial statements ending December, the company will record an expense of Rp100 and an accrued liability of Rp100.

Advertisement

Then, in January, the company spends cash (total assets decreases) amounted to Rp100 for payment. At the same time, the company also eliminates liability accrual account amounted to Rp100 (total liabilities decrease). 

Why you need to check this account

Deferred payments are a source of cash for the company. As long as it’s not yet due, the company can use some money for other purposes. So, the longer the maturity, the more loose the company is in handling cash.

But, when many accrued liability accounts are due at the same time, they, of course, could drain a company’s cash.

Economic Growth and Economic Development: Their Differences and Relationships

Economic growth has a close relationship with economic development. We need economic growth to support

Economic Growth: Factors, Importance, Impacts, How to Measure It

Economic growth refers to an increase in output in an economy over time. It can be short term or long term. In the short

Gini Coefficient: Meaning, Calculation Method, Data, Pros, and Cons

What's it: Gini coefficient is a statistic of economic inequality in a society. It tells you the distribution of income

Advertisement

Needs: Definition, Example, Type

What's it: Needs means requiring something because it is essential. For example, we need food, water, and shelter

Wants: Definition and Examples

What's it: Wants are hopes to have or fulfill something. If we want something, we expect to be able to buy it and

Hedge Funds Strategy: Macro, event-driven, relative value, and equity hedge strategies

Hedge funds rely on several strategies to make money. Hedge Fund Research, Inc. (HFRI) divides them into four

Hedge Funds:  Examples And What Do They Do?

What's is: Hedge funds are pooled investment funds by private investors, established in limited partnerships, and

Primary Sidebar

TOPIC

Accounting and Finance Business and Strategy Financial Statements Human Resources Investment Macroeconomics Marketing Microeconomics Operation

Advertisement

LATEST POST

  • Hedge Funds Strategy: Macro, event-driven, relative value, and equity hedge strategies
  • Leveraged Buyout (LBO): How it Works, Funding Sources, Criteria for Target 
  • Private Equity: Examples, Strategies, Targets, Its Ways To Make Money
  • Economic Growth and Economic Development: Their Differences and Relationships
  • Where Do Comparative Advantages Come From?
  • Three Injections In The Economy

MOST POPULAR

  • Business Size: Definition, Measurement, Classification
  • Span of Control: Importance, Types, Advantages, Disadvantages
  • The Role of Business in Society and the Economy
  • Government Intervention: Examples, Reasons, and Impacts
  • Sociocultural Environment: Meaning, Variables, Impact on The Business
  • List of Examples of Social Enterprises You May Be Familiar

Footer

SEARCH

POPULAR

  • Business Size: Definition, Measurement, Classification
  • Span of Control: Importance, Types, Advantages, Disadvantages
  • The Role of Business in Society and the Economy
  • Government Intervention: Examples, Reasons, and Impacts
  • Sociocultural Environment: Meaning, Variables, Impact on The Business

TOPIC

Accounting and Finance Business and Strategy Financial Statements Human Resources Investment Macroeconomics Marketing Microeconomics Operation

Copyright © 2023 · About Us  · Privacy Policy and Disclaimer  ·  Terms of Use  ·  Comment Policy  ·  Contact Us