A common accrued liability is service charges, for example for internet services. 

Services are used by the company throughout the month but the bill from the service provider typically doesn’t arrive until the next month.

Since the services have been used, at the end of the month, the expense must be accrued.

Let’s walkthrough an example: 

A company uses Liquid to provide internet to their company office, at a rate of 2M RWF per month. The company uses the service for all of June.

On July 10th, the company gets the bill from Liquid for 2M RWF.

On July 15th, the company pays Liquid the 2M RWF.

Qs: Thinking back to our liability definition, do we have a liability? Why or why not?

At the end of the month, when the company owes Liquid for the service used in June, what is the impact on the accounting equation?

                                 +2,000,000               -2,000,000

We increase a liability (accrued liabilities) because we owe the amount to Liquid.  The amount we owe is an expense (telephone/internet expense) which decreases equity.

Qs: What is the impact on the accounting equation?

Even though Liquid has not yet provided us an invoice we need to record the transaction.

Qs: Why do we need to record? Have the criteria to record been met?

    1.It is probable – in fact it is 100% as we’ve already used the service and have          probably signed a contract

    2.It is reliably measured – we know the cost of the monthly invoice

We increase telephone/internet expense (expense), so we debit

We increase accrued liabilities (liability), so we credit

Qs: What is the related journal entry?

It is now July 10th  and the company receives the invoice from Liquid for the amount owed (2M RWF). What is the impact on the accounting equation?

                                                        No impact 

• Since the company has already recognized the liability, the receipt of the invoice just confirms the amount accrued is correct. No further liability is recognized.
• However, the amount owed is no longer an estimate, it is now payable to Liquid, so must be classified as an account payable.

Qs: What is the impact on the accounting equation?

There is no impact! The liability is already recognized, as is the expense. The invoice only confirms the amount that is due.

However, the amount is no longer an estimate, as Liquid has confirmed the amount. We must move the liability from an accrued liability to a payable.

We decrease accrued liability (liability), so we debit

We increase accounts payable (liability), so we credit

Qs: Any idea what the journal entry would be to do this?

It is now July 15th  and the company pays the amount it owes to Liquid. What is the impact on the accounting equation?

                         -2,000,000             -2,000,000

• The company uses cash (asset) to pay the amount it owes to Liquid (liability).
• There is no impact on expenses or equity in July because we match the expense to the period when it was incurred (i.e. internet was used in June so the expense is recorded in June).

Qs: What is the impact on the accounting equation?

We exchange cash for a reduction in liability so no impact on equity.

We decrease accounts payable (liability), so we debit

We decrease cash (asset), so we credit

On July 15, the accounts payable balance is now 0 because we paid the amount we owed and no longer owe anything

Qs: What is the related journal entry?