Eliminate stress by tracking expenses for your business. In accrual accounting, not all expenses are the same. By understanding accrued liabilities, you will be able to see your company’s cost commitments for each accounting period.
In this article:
- What are accrued liabilities?
- Examples of accrued expenses
- Understanding accrued expenses vs deferred expenses
- What are accrued salaries?
- How to record an accrued expense in Xero or Quickbooks Online.
What Are Accrued Liabilities?
Accrued liabilities are expenses you have incurred, that will be paid at a later date. The use of accrued liability, only exists in accrual accounting. In cash accounting, there are no accrued liabilities. This is because you are recording income and expenses as cash changes hands. To determine if something is an accrued expense follow these three rules:
1. Money that accumulates
Accrued liabilities build up over time. While some accounts may accumulate, and are considered an accrued liability, they are not an accrued expense. All accrued expenses are accrued liabilities, but NOT vice versa. For example: sales tax is an accrued liability because it is money accumulating, to be settled later. However, it isn’t an incurred business expense.
2. It is reported but there is no invoice
If you have a bill, it is NOT an accrued liability. In that regard, it differs from accounts payable. Since there is no invoice, the expense is often estimated. Plus, liabilities can be extended far into the future.
3. Will be paid at a later date
If you paid the bill, it is NOT an accrued expense. For bill pay, you are dealing in accounts payable, and these bills are paid within a 30-90 day accounting period. Accounts payable does fall under current liabilities. However there is a distinction from accrued liability when the bill is paid.
Are Accrued Liabilities Current Liabilities?
Sometimes yes, accrued liabilities are current liabilities if the expense is due within a tax year. NOT all accrued liabilities are considered current liabilities. Accrued expenses tend to be incurred and paid in different accounting periods. While current liabilities tend to be settled within an accounting period.
Accrued Liabilities and Cash Flow
Many accrued expenses will rest on the balance sheet for longer than a year. There is no special treatment in reversing it in the next year, since you are reporting the expense in the correct year. Accrued liabilities will affect your cash flow because it is a decrease to your profit. Thus, you pay less tax and increase your cash flow by pushing down income in years with the higher tax payment.
Accrued Expense vs Deferred Expense
Accrued expenses are paid later. Deferred expenses are paid upfront, but have not been reported. These usually mark prepaid expenses. This type of accounting can be tedious and is irrelevant to most small businesses. Deferred expense journal entries are reserved for large expenses. For example: Your company paid an annual health insurance premium at the start of the year. This is a deferred expense that will be spread out and reported as it is “used” throughout the year.
Examples of Accrued Liability:
As a business owner you should be accounting for these items as accrued liabilities:
- Accrued payroll: Wages, salaries, commissions and bonuses
- Accrued payroll deductions: Employee health plan premiums, employer contributions to retirement plans, and charitable contributions
- Sales taxes and payroll taxes (FICA, FUTA taxes, unemployment taxes, etc)
- Business loans and interest payments
- Mortgage, rent, and utilities
- Goods & Services: pre orders without a bill
Generally accrued payroll is the #1 expense for a company. It equals the amount of employee earnings that have not been paid out. Tracking accrued salaries via your payroll account will show your liability, based on cumulative employee salaries.
Until the start of a new period, the unpaid salary portion will sit on the balance sheet. All accrued salaries will have adjusting entries for pay periods that cross over accounting periods. See how much to accrue for bi-weekly payroll in the example below:
- If you pay an employee $100,000/year: that rounds off to $1923/week (52 week year) and $385/day (5 day work week).
- If the last day of the month happens on a Wednesday within a pay period, you will make an accrued salary adjusting entry for the last 3 days of the month. That rounds off to $1155.
- This entry reports payroll in the correct accounting period, and notes the amount that will be paid in the next accounting period.
You will need to perform this for all employee wages. Accrued salary expenses are always coupled with taxes and withholdings. Don’t forget, payroll taxes and withholdings are accrued liabilities as well. They need separate accrued liability journal entries.
How To Record An Accrued Expense Journal Entry
With accrual accounting, you perform double entry to minimize cash leakage. When you accrue an expense it is noted across multiple accounts, via accrued expense journal entries. Once the bill is paid a reversal entry occurs. The reversal should balance out all accrual entries across your accounts. To explain this process we use the following business scenario:
A phone store gives their sales team members 10% commission on each sale. Ela has a good day in October, and sells $1000 worth of electronics. Her $100 commission will be reported on the day it was earned. She will accrue more commissions, but will not get paid until November.
To enter this accrued commission into the books we start by making a journal entry. An accrued expense journal entry affects expense and liability accounts. For proper recording you should have a chart of accounts for your expenses, including an account for accruals.
First, we need to estimate the expense. No need to worry about tax until the entire commission check is settled. We estimate that today’s commission payment is $100. That amount is debited to the payroll expense account, increasing how much is owed. Simultaneously the amount is credited to your liability account, increasing how much is owed. The totals will be reflected on the balance sheet.
Ela’s daily commissions will accrue in this manner until November. These accrued expense journal entries adjust your books between accounting periods. The balance sheet is a temporary holding zone for liabilities. When you close out the accounting period, you know how much commissions are due next month.
Come November, Ela receives her commission check. So a reversal journal entry will take place. If the accounting period is closed, you need to true the commission estimate to the actual expense paid. The liability account is debited, and the payroll expense account is credited, decreasing what is owed in both accounts. Now the total commission entry comes off the balance sheet. The amount is then debited to income on the income statement.
Review of Steps of an Accrued Expense Journal Entry
- Estimate the accrued expense due
- Debit the expense account
- Credit the accrued liability account
- Accruals will continue to accumulate in this manner
- When the expense is paid, true the estimate to the actual payment
- Debit the accrued liability account
- Credit your expense account
- Debit the expense to income on the income statement
Automating Accrued Journal Entries in Xero and Quickbooks Online
Most transactions do NOT require journal entries. However it is wise to make one for an accrued expense. To do this, estimate the amount you want to accrue. Do this by taking an average of the last three months of the expense. Then, follow the steps below to enter the accrued liability into Xero or QuickBooks Online:
Accrued Expense Journal Entry in Xero
- In the Dashboard click on the Accounting dropdown menu
- Select Manual Journals
- Make a reversing journal entry by clicking on +New Journal
- Uncheck the box for “Show journal for cash basis reports”
- Enter a Narration “Accrue for (title of the bill)”
- Select the Date dropdown box of the accrued expense
- Select Auto Reversing Date for when it will be reversed/paid on the left hand side
- Then you will want to chart the accrual to its appropriate accounts. Note: you should have an account for Accruals
- Add a Description for each account (one account per line)
- Select the appropriate accounts for the expense (ex: Rent, and Accruals)
- Then add the amount to debit (move out of the expensed account).
- Below add the amount to credit into the Accrual account
- Since it was set to auto reverse, the opposite will happen with the accrued expense reversal entry
Accrued Expense Journal Entry in QuickBooks Online
- Select + New.
- Select Journal entry.
- Select the Date dropdown box of the accrued expense
- Select the Accrual accounts
- Then add the amount to credit (move into Accruals)
- On the 2nd line below select the expense sub account
- Then add the amount to debit the expense account
- Select Save
Automatic Journal Reversals
Using cloud-based accounting software you can make journal reversal entries. Here is are the steps for Xero + QuickBooks Online:
Journal Reversing Entries in Xero
Setting an auto-reverse date for accrued expense journal entries in Xero is simple. It is recommended to do this when you are entering the accrual. If you forget, you can auto-reverse from a posted entry:
- Select the Advisor Menu
- Select the Manual Journals
- Select the journal entry to be reversed
- Select the Journal Options dropdown menu
- Hit Reverse, this adds a note in the narration that it is a reversal
- Select the date of the reversal
- Then hit Post
Journal Reversing Entries QuickBooks Online
In Quickbooks online there is some manual effort needed to do a journal entry reversal. You have to select to reverse each individual entry, at the time of payment. At this time you cannot set up a future auto reversal in QuickBooks Online. But they have a feature that will individually reverse entries, minus double data entry. Here are the steps:
- Select the Gear icon on the Toolbar.
- Under Your Company, select Chart of Accounts.
- Locate the appropriate account for the transaction.
- From the Action column, select View Register (or Account History).
- Select the journal entry and select Edit.
- In the transaction window select Reverse.
There are three rules to accrued expenses: it accumulates, there is no invoice, and it will be paid later. All expenses of this nature should be lumped into an accrued liability account. Estimating and automating accrued expense journal entries will get easier over time. They provide instant visibility into your future expenses. Accrued liabilities help businesses see what they owe at the end of each accounting period. Keeping you on target to meet your money goals, and stay out of the red.