Unraveling Payables and Accrued Liabilities for the U.S. FAR CPA Exam
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Payables and accrued liabilities are fundamental short-term obligations on a company's balance sheet, and a well-tested topic on the FAR section of the CPA exam.
What's the difference between accounts payable and accrued liabilities?
Accounts payable represents amounts owed to suppliers for goods or services already received but not yet paid for — and an invoice has been received.
Accrued liabilities are obligations for goods or services already received, but the supplier hasn't invoiced the company yet.
When are these liabilities recognized?
Both accounts payable and accrued liabilities are initially recognized at their transaction price. Recognition occurs when the company receives the goods or services, and it's probable that an outflow of resources will be required to settle the obligation.
How do you record accounts payable?
Accounts payable are straightforward — they're created when an invoice is received.
Example: A business orders $5,000 worth of goods and receives an invoice with 30-day payment terms.
- Debit Inventory $5,000
- Credit Accounts Payable $5,000
How do you record an accrued liability?
Accrued liabilities are slightly more complex — they require an accountant to estimate an expense before an invoice is received.
Example: The total estimated wage expense for a week is $10,000, but it won't be paid until the following week. The entry to record the accrued wages at the end of the week:
- Debit Wage Expense $10,000
- Credit Accrued Wages Payable $10,000
What do adjusting entries look like for accrued liabilities?
Accrued liabilities often require adjusting entries to ensure expenses are recognized in the period they're actually incurred, not the period they're paid.
Example: A company incurs a $1,200 service expense in December but won't pay the bill until January. The adjusting entry needed at year-end:
- Debit Service Expense $1,200
- Credit Accrued Service Payable $1,200
How do you record paying off the liability?
When it's time to pay off either accounts payable or an accrued liability, the journal entries are similar — you debit the liability and credit cash.
Example: Paying off the $10,000 in accrued wages from the earlier example:
- Debit Accrued Wages Payable $10,000
- Credit Cash $10,000
What gets disclosed?
Disclosures for payables and accrued liabilities typically include a breakdown of the types and nature of the liabilities, along with their expected settlement dates.
The key distinction is simple: an invoice means accounts payable; no invoice yet means an accrued liability. Both get recognized at transaction price as soon as the goods or services are received, and both get closed out the same way — debit the liability, credit cash — when they're finally paid.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.