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Accrued Liabilities

The Concept of Accrued Liabilities Explained With an Apt Example

Being aware of the accounting concepts under GAAP is essential for all accountants and students of management and accounting. The article below explains what accrued liabilities are.
BusinessZeal Staff
Last Updated: Jun 3, 2018
A knowledge of the assets and liabilities of a company is essential for all potential investors, as it conveys to them the financial performance till date and financial strength of the company. One can understand these assets and liabilities by carefully analyzing the balance sheet, which is an important financial statement. The ability of a firm to keep its liabilities under control is the decisive factor of its steady growth and increasing profits. Accrued liabilities payable are the liabilities that have been incurred by the business firm, which however, have not been paid completely. These are disclosed in financial statements by the company, and before investing, one should study them carefully.

The Concept Explained
  • As said above, these are the expenses, which a firm owes for the accepted goods and services from the other party.
  • They are shown under the liabilities column of the balance sheet and are actually the current liabilities of the firm.
  • Analysts are of the opinion that these should be included in the current liabilities if they are due for the company in less than one year.
  • In accounting, this is one of the most important and commonly-discussed concept.
  • Though interpreting the definition is easy as compared to other accounting concepts, it will be better understood with the help of some examples.
Examples

Scenario I
  • Tax liabilities incurred by a company during a particular financial year can be the best example.
  • Companies sell their products to their clients in exchange of cash or assets, and this income is obviously taxable as per the taxation laws and rules of different countries.
  • Unless the firm clears all its tax liabilities, this would be an accrued liability for it.
Scenario II
  • It can also be in the form of due payment of salaries or wages to workers.
  • There are occasions when companies have to postpone payments to their employees due to financial crunch.
  • This can happen in the times when the order inflow gets reduced and the entire economy is under pressure.
  • The amount which is due will remain until they are cleared off by the company management.
Scenario III
  • Due loans, which are unpaid, will also be included in the accrued liabilities column.
  • The liabilities are included in the accounts payable until they are cleared or paid completely by those who owe them.
Reducing the liabilities steadily should be on the minds of company executives or independent business people. Mounting of liabilities can pose serious problems and hence, with efficient business management, these liabilities can be brought under control. Generally, these are either recurring or infrequent.

This information will help you to know how to judge a company financially. All people interested in stock investing need to do so after considering all financial aspects to make great profits.