Unraveling Payables and Accrued Liabilities for the U.S. FAR CPA Exam
Payables and accrued liabilities are fundamental components of a business's financial statements, serving as critical indicators of a company's short-term financial obligations. Whether you’re a CPA candidate or a seasoned accountant, mastering the accounting for these items is essential. This article explores the key concepts, methods, and journal entries relating to payables and accrued liabilities under U.S. Generally Accepted Accounting Principles (U.S. GAAP).
Definitions
Accounts Payable
Accounts payable represents the amounts owed to suppliers for goods or services received but not yet paid for.
Accrued Liabilities
Accrued liabilities are obligations incurred by a business for which goods or services have been received, but the supplier has not yet invoiced the company.
Recognition and Measurement
Both accounts payable and accrued liabilities are initially recognized at their transaction price. The recognition should occur when the company receives goods or services, and it’s probable that an outflow of resources will occur to settle the obligation
Accounts Payable
Accounts payable are straightforward. They are created when an invoice is received.
Example 1: Journal Entry for Accounts Payable
Imagine a business orders $5,000 worth of goods and receives an invoice with 30-day payment terms. The journal entry would be:
Debit Inventory $5,000
Credit Accounts Payable $5,000
Accrued Liabilities
Accrued liabilities are slightly more complex as they require an accountant to estimate an expense before an invoice is received.
Example 2: Journal Entry for Accrued Wages
Suppose the total estimated wage expense for a week is $10,000 but will not be paid until the following week. The entry to record the accrued wages at the end of the week would be:
Debit Wage Expense $10,000
Credit Accrued Wages Payable $10,000
Adjusting Entries
Accrued liabilities often require adjusting entries to ensure that expenses are recognized in the period in which they are incurred.
Example 3: Adjusting Entry for Unrecorded Service Expense
If a company incurs a $1,200 service expense in December but will not pay the bill until January, an adjusting entry would be needed:
Debit Service Expense $1,200
Credit Accrued Service Payable $1,200
Paying Off Liabilities
When it’s time to pay off either accounts payable or accrued liabilities, the journal entries are Similar.
Example 4: Journal Entry for Paying Off Accrued Wages
Upon paying the $10,000 in accrued wages from Example 2, the journal entry would be:
Debit Accrued Wages Payable $10,000
Credit Cash $10,000
Disclosures
Disclosures regarding payables and accrued liabilities usually involve a breakdown of the types and the nature of the liabilities, along with their expected settlement dates.