The search for unrecorded liabilities
Four October bills sorted by when the cost was incurred: $2,490 accrued to September, one passed under the floor, one left for October.
A bill that arrives after month end can still belong to last month. The search for unrecorded liabilities reads the bills and payments entered in the first weeks of the next month and asks of each one: when did the goods or the service arrive? Not the date on the bill, and not the date it is paid. This is cut-off again, and it is the same search an auditor runs.
Three outcomes. The freight and the packaging were received before the 30th and are not accrued, so they are September's cost: $2,490 together. The power bill is for September too, but $450 of its $472.80 is already accrued, and the $22.80 left is under the floor, so October's true-up takes it, as it did in the earlier lesson. The training is for October; a bill dated September 30 does not move the cost back. If Northwind had paid it early, it would sit as a prepaid, not an expense.
Costs received in September and billed in October
| Account | Debit | Credit |
|---|---|---|
| 1300Inventory | 1,850.00 | |
| 6700Equipment and supplies expense | 640.00 | |
| 2200Accrued liabilities | 2,490.00 | |
| Balanced | 2,490.00 | 2,490.00 |
September's accrual for the two costs. No bill exists in the system yet, so the credit is accrued liabilities, not payables.
Reverse the September accrual
| Account | Debit | Credit |
|---|---|---|
| 2200Accrued liabilities | 2,490.00 | |
| 1300Inventory | 1,850.00 | |
| 6700Equipment and supplies expense | 640.00 | |
| Balanced | 2,490.00 | 2,490.00 |
Reversed on the first day of October, so the real bills can be booked as usual and the cost is not counted twice.
Step 1: Set the window
Pick the window: bills and payments entered after the period end, through the day the close finishes. At year end, look further.
Step 2: Date the cost, not the bill
List each bill and each payment, with the date the goods arrived or the service was done. Ask the person who ordered it if the bill does not say.
Step 3: Sort by period
After the period end: next period. On or before: it belongs in this one. Subtract anything already accrued.
Step 4: Accrue and note
Anything unrecorded at or above the floor is accrued. Record what you passed on, and why.
Step 5: Reverse
Reverse the accruals on the first day of the next month and book the bills normally.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 405 (opens in a new tab)LiabilitiesFree after registration
- ASC 105-10-05-6 (opens in a new tab)Immaterial items — why a capitalization threshold is allowed at allFree after registration
- Conceptual framework
- CON 8, Introduction — as amended by Ch. 4, App. A (carrying forward CON 6, ¶139) (opens in a new tab)What accrual accounting is forFree to read
The full map is in US GAAP, and where these rules come from.
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- CutoffRecording each transaction in the period in which it occurred — the boundary tested at every period endConvention
- AccrualAn expense incurred, or revenue earned, before it is invoiced — recorded at period end so it lands in the right period
- Accrued liabilityAn obligation for goods or services received but not yet invoiced or paid — wages, interest, professional fees — recorded by an accrual
- Reversing entryAn entry dated the first day of the next period that exactly offsets a period-end accrual, so the real invoice can be coded normally without double-countingConvention
- True-upThe adjustment that replaces an estimate with the actual amount once it is known
- MaterialityWhether a misstatement or omission would likely change the judgment of a reasonable user of the statements — judged on size and nature together, never a fixed percentage
- Unrecorded liabilities searchThe audit procedure of looking at payments made and bills received after period end, and at receipts with no bill, to find obligations that existed at the balance sheet date but were never recorded. Management runs the same search before close, because what it finds is accruedConvention
See also
- Schedules, accruals & roll-forwardsEvery balance sheet account needs a schedule behind it, and the schedule has to tie to the GL. Most accounting products ship a ledger and statements and leave the schedules in spreadsheets. That handoff is where closes break.
- Periods & the closeThe month-end close in accounting software: fiscal calendars, period states, cutoff, reconciliation vs tie-out, adjusting entries and restatement.
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.
- Accrued expenses vs accounts payable at month-endAP is a bill you’ve received; an accrued expense is a cost incurred before the bill arrives. When to accrue, and how reversing entries work, by example.
- CutoffThe line between one period and the next. Revenue and expenses land in the month they belong to, especially transactions dated just either side of month end.
- Accrued expensesCosts you've incurred by month end but haven't been billed for yet, like legal work, usage-based software or payroll that spans the month end.
- UninvoicedReceiptsReportGR/IR aging. The evidence for the period-end accrual.
- AdjustingEntryFormTemplated by type. Auto-reverse defaults on for accruals.