The year-end close of your organization’s books involves many steps. An often-challenging task in ensuring your books are complete is the close of your liability accounts, particularly accrued expenses. Accrued expenses are those costs that you have incurred, but have not yet been paid. It is important that the proper steps to accrue for liabilities are not overlooked.
If your organization has received goods or services during the year and has not paid for them, you must record a liability at year-end. Examples of common accrued liabilities include utilities, taxes, payroll, legal fees, and other consulting fees.
Payroll is one of the most common accrued liabilities at year-end and frequently missed in the year-end close. Often, the first pay date in January is for a pay period that includes several days in December which would require accrual. Additionally, any bonuses that have been earned are often included in the January payroll. The salaries and wages for the time employees have worked in December and all bonuses earned need to be accrued for at year-end, as well as vacation time earned but not yet used by employees, employer’s portion of payroll taxes, and employer contributions to retirement plans.
Invoices for legal and other consulting services performed during the year may not be received until after year-end. Correct practice is to accrue the liability and related expense in the year the work was performed.
In order to ensure that all liabilities are recorded in the proper period, try a few of our year-end best practices:
Make a list of all accrued liability accounts and common vendors. Compare your list from previous years and previous months to your current list. This step may help you to notice a missing vendor or transaction that might have been omitted from your list. Make sure transactions and invoices are entered as of year-end and not forgotten!
Perform a search for unrecorded liabilities. Look at your cash disbursements subsequent to year end to see if there was anything that should have been accrued for in the prior year.
Be aware. Be familiar with what is happening within your organization. If a legal team or a consultant has been working at your office frequently, there may be a need to accrue for legal or consulting fees. There may even be a need to accrue for a potential loss or expense of the actual litigation. Keep your eyes and ears open.
These are only a few examples of the many accrued liabilities that may occur at year-end and our suggested best practices to identify them. If you need help with recording accrued liabilities or carrying out measures to identify accruals, feel free to contact Kristi Yanover and we will be happy to assist.