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    Accrued Libilities: Balance Sheet

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    MusthaqMohammedMadathil
    This document discusses accrued liabilities. [1] Accrued liabilities represent expenses that have been incurred but not yet paid, such as accrued interest, wages, taxes, and utilities. [2] Under accrual accounting, expenses must be recorded in the period they are incurred rather than when payment is made to match expenses with revenues. [3] Accounts payable differ from accrued liabilities as accounts payable are based on invoices while accrued liabilities involve estimation and are adjusted at period end.

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    Accrued Libilities: Balance Sheet

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    MusthaqMohammedMadathil
    40 views2 pages
    This document discusses accrued liabilities. [1] Accrued liabilities represent expenses that have been incurred but not yet paid, such as accrued interest, wages, taxes, and utilities. [2] Under accrual accounting, expenses must be recorded in the period they are incurred rather than when payment is made to match expenses with revenues. [3] Accounts payable differ from accrued liabilities as accounts payable are based on invoices while accrued liabilities involve estimation and are adjusted at period end.

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    Accrued Libilities

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    This document discusses accrued liabilities. [1] Accrued liabilities represent expenses that have been incurred but not yet paid, such as accrued interest, wages, taxes, and utilities. [2] Under accrual accounting, expenses must be recorded in the period they are incurred rather than when payment is made to match expenses with revenues. [3] Accounts payable differ from accrued liabilities as accounts payable are based on invoices while accrued liabilities involve estimation and are adjusted at period end.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    40 views2 pages

    Accrued Libilities: Balance Sheet

    Uploaded by

    MusthaqMohammedMadathil
    This document discusses accrued liabilities. [1] Accrued liabilities represent expenses that have been incurred but not yet paid, such as accrued interest, wages, taxes, and utilities. [2] Under accrual accounting, expenses must be recorded in the period they are incurred rather than when payment is made to match expenses with revenues. [3] Accounts payable differ from accrued liabilities as accounts payable are based on invoices while accrued liabilities involve estimation and are adjusted at period end.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    7/18/2017 Accrued Libilities

    Accrued Libilities
    accountingexplained.com /financial/current-liabilities/accrued-liabilities

    Accrued liabilities is a line item on a company’s balance sheet which represents liabilities that arise out of accrued
    expenses, which are expenses that are incurred but not yet paid.

    Accrued expenses are normally periodic expenses which are paid in arrears i.e. after they are consumed. For example,
    a company’s electricity bill is received after the end of the month in which the electricity is consumed. It is important to
    record the electricity expense in the period in which the electricity is consumed by making relevant adjusting entry at the
    end of the accounting period. Accrual of expenses results in presentation of accrued expenses (in the relevant account
    heads like electricity expense, salaries expense, etc.) in income statement and accrued liabilities on balance sheet.

    Accrued liabilities are recorded under the accrual basis of accounting in accordance with the matching concept.
    Generally accepted accounting principles require that expenses need to be recognized in the period in which they are
    incurred and not in the period in which related payment is made.

    There is a subtle difference between accounts payable and accrued liabilities. While accounts payable are recorded in
    normal course of business based on proper invoices from suppliers, accrued liabilities are mostly recorded at the end of
    the accounting period and involves considerable estimation.

    Accrued liabilities are normally reversed in the next period and the liability is recorded at the correct amount when
    relevant invoice is received.

    Examples
    Typical examples of accrued liabilities include:

    Accrued interest payable


    Accrued wages and commission
    Accrued payroll taxes
    Accrues electricity and other utilities
    Accrual of services like audit fee, professional association membership fees, etc.

    Journal entries
    ZK Construction, Inc. financial year ends on 30 June 2015. The board appointed its external auditor in May 2015 which
    started the audit in the last week of June. The initial estimation of total cost of the assignment was $15,000. After
    completion of the audit, the auditor sent an invoice for $17,500 representing the actual hours spent on the assignment.

    Suggest accounting treatment for the following transaction.

    The above example provides a good example of accrual basis of accounting and the process of recognition of accrued
    expenses and accrued liabilities.

    The audit fee is recorded in the financial year ended 30 June 2015 because it is a regulatory requirement related to that
    year. It is recorded using an adjusting entry as at 30 June 2015 at an amount representing the best estimation of the
    eventual payment, which is $15,000.
    7/18/2017 Accrued Libilities

    Audit expense 15,000

    Accrued audit fee payable 15,000

    After closing entries are passed and financial statements for financial year 2015 are prepared, the company shall make
    a reversing entry cancelling the above accrual.

    Accrued audit fee payable 15,000

    Audit expense 15,000

    In the next year when actual invoice is received, it is recorded and paid as follows:

    Audit expense 17,500

    Audit fee payable 17,500

    Audit fee payable 17,500

    Bank 17,500

    The effect of accrual is that in the financial year 2015, audit fee of $15,000 appears in the income statement and accrued
    audit liability appear on balance sheet under current liabilities.

    Written by Obaidullah Jan, ACA, CFAhire me at

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