An expense may be incurred in the current period even though no cash payment will be made until a future period. An accrued liability is an obligation incurred in the current accounting period but not due for payment until after the end of the period, usually payable within the following 12 months. An accrued liability is created when an existing obligation that is not yet due for payment is first recorded in the end-of-period adjustment process required by accrual accounting.
| Accrued Liability (Example) | ||||
| OurCo owed €25,000 interest on financing for the month of December 2016. | ||||
| 31 Dec 16 | Interest Expense | 25,000 | ||
| Interest Payable | 25,000 | |||
| To record accrued interest expense on 31 Dec 2016 | ||||
Accrued interest is the interest that has accrued during an accounting period but not due for payment until the following accounting period or later.
A liability that represents payment received in advance of the delivery of goods or the rendering of services for which prepayment is made is deferred income. Advance payments may be required by the seller as a condition of the sale or may be made by the buyer as a means of guaranteeing performance of the desired service or delivery of the product by the seller.
Payment received before it is earned is a liability, the revenue recognition having been deferred until the end of the accounting period or later. An adjusting entry is made to recognize the revenue earned during the period at the end of the period that goods are actually delivered or services are actually rendered,
| Deferred Income (Example) | ||||
| RealCo received advance rent of €5,000 from YourCo on December 2016 for January 2017. RealCo’s accounting year ends 31 December. | ||||
| 31 Dec 16 | Cash | 5,000 | ||
| Prepaid Rental | 5,000 | |||
| To record receipt of prepaid rental on 31 Dec 2016 | ||||
| 31 Jan 17 | Prepaid Rental | 5,000 | ||
| Rental Revenue | 5,000 | |||
| To record realization of earnings on 31 Jan 2017 | ||||