How to Report Accrued Expenses Payable
The controller should prepare a schedule for the manager that lists the major items making up the balance of the accrued expenses payable liability account. Many operating liabilities accumulate or, as accountants prefer to say, accrue during the course of the year that are not paid until sometime later.
One main example is employee vacation and sick pay; an employee may work for almost a year before being entitled to take two weeks vacation with pay. The accountant records an expense each payroll period for this employee benefit, and it accumulates in the liability account until the liability is paid. Another payroll-based expense that accrues is the cost of federal and state unemployment taxes on the employer.
Accrued expenses payable can be a tricky liability from the accounting point of view. There’s a lot of room for management discretion (or manipulation, depending on how you look at it) regarding which particular operating liabilities to record as expense during the year, and which not to record as expense until they are paid.
The basic choice is whether to expense as you go or expense later. If you decide to record the expense as you go through the year, the accountant has to make estimates and assumptions, which are subject to error. Then there’s the question of expediency.
Employee vacation and sick pay may seem to be obvious expenses to accrue, but in fact many businesses do not accrue the expense on the grounds that it’s simply too time consuming and, furthermore, that some employees quit and forfeit the rights to their vacations.
Many businesses guarantee the products they sell for a certain period of time, such as 90 days or one year. The customer has the right to return the product for repair (or replacement) during the guarantee period.
For example, if someone returned their iPad for repair, Apple should have already recorded in a liability account the estimated cost of repairing iPads that are returned after the point of sale. Businesses have more “creeping” liabilities than you might imagine.
The manager should know what’s in the accrued expenses payable liability account, and what’s not. Also, the manager should have a good fix on when these liabilities will be paid.