The term accrued liabilities refers to unpaid expenses resulting from contractual agreements with another party. Accrued liabilities appear as a current liability on a company's balance sheet, and include items such as income taxes, the company's share of payroll taxes, property taxes, and compensated absences.
Current liabilities are defined as debts that must be paid within one year or one operating cycle, whichever is longer. Accrued liabilities are also part of the company's definitely determinable liabilities, since they are both known to exist and can be measured precisely.
Generally, accrued liabilities fall into one of the following subcategories:
- Payroll Taxes: the money collected from an employee via a payroll deduction is considered collections for third parties. However, the company's share of payroll taxes is considered an accrued liability until paid by the company to the state or federal agency. Examples of payroll taxes include FICA and state-level unemployment tax.
- Property Taxes: local governments generally collect property taxes on a quarterly basis. The accounting convention is to accrue one-third of the quarterly taxes owed each month.
- Compensated Absences: if the obligation can be reasonably estimated, payment is probable, and the benefit is vested (or accumulates over time), the company is required to accrue a compensated absence such as vacation, illness, and holiday pay.
Company A's headquarters is located in New York City. Company A's property taxes for this location are $180,000 per year, or $15,000 per month, payable in the months of March, June, September, and December. In the month of February, Company A would accrue this liability in the following manner:
In the month of March, Company A needs to remit their quarterly property taxes to the City of New York. The journal entries to account for this transaction are as follows: