Accrued Expenses and Liabilities

Accrued expenses represent costs that have been incurred but not yet paid or recorded through a formal invoice.

These expenses are recognized to comply with the matching principle, ensuring that expenses are recorded in the period they are incurred.

Accrued liabilities appear as current liabilities on the balance sheet and directly impact the company’s working capital position.

Failure to recognize accrued expenses accurately results in understated liabilities and overstated net income.

Overview / Definition

Accrued expenses are expenses recognized before cash payment is made, reflecting obligations that have arisen but remain unpaid at the reporting date.

Common examples include salaries and wages payable, interest payable, utilities, taxes, and professional services.

These expenses must be recorded through adjusting journal entries at period-end to ensure accurate financial reporting.

Accrued liabilities help present a true picture of a company’s obligations and financial health under US GAAP and IFRS.

Recognition and Measurement

Recognition Criteria:

✦ The company has incurred the expense by the reporting date.

✦ The amount can be reasonably estimated.

✦ Payment will be made in a future period.

Example – Accrued Salaries:

• Monthly Salaries: $20,000

• Pay Period: December 25th to January 10th

• As of December 31st, 7 days of salaries remain unpaid.

Accrued Salary Expense = $20,000 ÷ 31 × 7 = $4,516

Journal Entry on December 31st:

debit Salaries Expense – 4,516

credit Salaries Payable – 4,516

Payment Entry on January 10th:

debit Salaries Payable – 4,516

debit Salaries Expense – 15,484

credit Cash – 20,000

Journal Entry Examples

1. Accrued Utilities Expense ($1,200):

debit Utilities Expense – 1,200

credit Utilities Payable – 1,200

Payment of Utilities Bill:

debit Utilities Payable – 1,200

credit Cash – 1,200

2. Accrued Interest on Loan:

• Loan Balance: $100,000

• Annual Interest Rate: 6%

• Accrual for 1 Month = $100,000 × 6% ÷ 12 = $500

Journal Entry:

debit Interest Expense – 500

credit Interest Payable – 500

Disclosure Requirements

Companies must disclose:

✦ The nature and types of accrued liabilities.

✦ Significant accrued balances expected to be settled beyond 12 months.

✦ The company’s accounting policies for recognizing and measuring accrued expenses.

Disclosures typically appear in the notes to the financial statements under the Current Liabilities section.

IFRS Comparison

Criteria	US GAAP	IFRS
Recognition of Accruals	Required	Required
Measurement Basis	Best Estimate	Best Estimate
Classification	Current Liability	Current or Non-Current Based on Timing
Disclosure Requirements	General	More Detailed Disclosures

IFRS requires detailed information if significant accrued liabilities are expected to be settled beyond one year, potentially classifying them as non-current liabilities.

Common Errors

✦ Failing to Recognize Accruals at Period-End: Leads to understated expenses and liabilities, inflating net income.

✦ Incorrect Estimation of Accruals: Using outdated or inaccurate data for calculating accrued expenses.

✦ Delayed Reversal of Accruals: Not properly reversing accrued liabilities when payment is made, overstating liabilities.

✦ Misclassification of Accrued Liabilities: Presenting long-term accruals as current liabilities, distorting liquidity ratios.

✦ Omitting Required Disclosures: Not providing details on significant accrued expenses and liabilities in financial statement notes.