Accrued liabilities refer to financial obligations that have not yet been credited from the company’s bank accounts due to the non-receipt of invoices for these obligations.
What Are Accrued Liabilities?
Accrued liabilities are incurred when a business purchases goods and services on credit due to which they do not receive invoices at the time of the purchase. They are expected to pay the amounts due in the future. When a company purchases goods or services on a credit basis, its bank or cash accounts do not get affected. The balance is allocated to the trade payables account which is reflected in the balance sheet. The purchase account is debited as it does in a normal cash purchase.
These transactions are usually recorded in the current liabilities section of the balance sheet and the balance is then written off once the company pays for the goods or services purchased.
The transaction is recorded on the date the goods or services are received as the company has reaped the benefits at the time of the purchase, thus the transaction must be recorded at the time the goods or services are received. This is done due to the accounting method of accruals which follows the matching concept.
When Are the Accrued Liabilities Written Off?
Accrued liabilities are only written off once the business pays the accrued balance. It is credited from the bank or cash balance and reduces the balance in the liability’s account.
Types of Accrued Liabilities
There are two types of accrued liabilities that a business can incur:
Routine Accrued Liabilities
These liabilities are incurred due to a company’s day-to-day activities such as purchasing raw materials. These are incurred multiple times in a year and are recorded in the trade payables account or other payables account. A few examples would be raw materials bought on credit or wages accrued to employees.
Non-routine Accrued Liabilities-
Non-routine liabilities occur on very few occasions. These liabilities are related to the non-operating duties of the company.