Accrued liabilities are business expenses that have yet to be paid for. In other words, accrued liabilities are a type of business debt. These liabilities are only reported under an accrual accounting method.
Learn more about this little-known (but still very important) part of your business's financial position.
What Are Accrued Liabilities?
Accrued liabilities are amounts you owe in the future. They are included on your business balance sheet. A liability might be a loan or a mortgage on a business building. A liability might be short-term or long-term. For example, the part of a loan that is due within a year is short-term, but the rest of the loan is long-term.
How Do Accrued Liabilities Work?
Your business balance sheet records your business assets on one side, and on the other side, the balance sheet shows liabilities and owner's equity. The accrued liabilities are included on the right side of the balance sheet. Short-term accrued liabilities (those expected to be paid in less than a year) are shown before long-term liabilities.
Accrued liabilities only apply to companies that use accrual accounting methods. That's because only accrual accounting records transactions when they occur—even if money hasn't changed hands yet. If you aren't using accrual accounting, you won't account for a cost until you've paid for that expense. That means you wouldn't have any accrued liabilities.
When something is "accrued," that means it accumulates. In accounting terms, if a liability accrues, it means that the liability must be paid at some future date. So accrued liabilities accumulate over time, and they are paid at specific times.
To better understand this idea, think about the sick time you may earn at your work. The sick time accrues (accumulates) as you work more. That sick time waits there for you until you decide to spend it at some point in the future.
Examples of Accrued Liabilities
Two common types of accrued liabilities concern sales taxes and payroll taxes. These costs accrue—meaning the amounts accumulate over time—and then they are paid. These payables are created from specific transactions.
When your business sells a taxable item or service, you must collect the sales tax, then you must report the amounts collected and make payments to your state's tax department periodically.
A simple sales tax accrued liability transaction might start with a sale that came with a $13.40 sales tax charge. You collect $13.40 from the customer to cover the sales tax. Since you haven't paid that tax yet, you include it on your accounting software as an accrued liability in the "sales taxes payable" category. Then, at the end of the year or quarter, you pay this sales tax, along with any other sales taxes collected throughout the period. At that point, the $13.40 can be removed from the accrued liabilities.
Every time you run payroll for your business, you are responsible for withholding FICA taxes, unemployment taxes, and other forms of employment taxes. The process described for sales taxes works the same for each of these payroll tax payable accounts. When the payroll is run, the payroll taxes are entered into the accounting software as accrued liabilities. When the payments are made, the amounts are removed from accrued liabilities.
Any other deductions from payroll could also be accounted for as an accrued liability, such as:
- Deductions for employee health plan premiums
- Deductions and employer contributions to employee retirement plans
- Deductions for charitable contributions, like United Way or internal "sunshine" funds
Trust Fund Taxes
Sales taxes payable and payroll taxes payable are called trust fund taxes because the amounts are held in trust for payment to federal and state taxing agencies. These accrued liabilities should be held in a separate account or kept separate in other ways so you won't be tempted to use them.
The Internal Revenue Service (IRS) and state taxing agencies impose trust fund penalties on businesses that don't pay these taxes. In the case of the IRS, these trust fund recovery penalties can be imposed on the individual who is responsible for the payment of these taxes and who "willfully fails to collect or pay them." The responsible person can be held personally liable.
- Accrued liabilities are expenses that a business hasn't yet paid for.
- Accrued liabilities only apply to businesses that use accrual accounting methods, which account for transactions when they occur rather than when they are paid for.
- Common accrued liabilities include sales taxes and payroll taxes.