What Is Accrued Liability?

The term “accrued liability” refers to an expense incurred but not yet paid for by a business. These are costs for goods and services already delivered to a company for which it must pay in the future. A company can accrue liabilities for any number of obligations and are recorded on the company’s balance sheet. They are normally listed on the balance sheet as current liabilities and are adjusted at the end of an accounting period.

Understanding Accrued Liability

An accrued liability is a financial obligation that a company incurs during a given accounting period. Although the goods and services may already be delivered, the company has not yet paid for them in that period. They are also not recorded in the company’s general ledger. Although the cash flow has yet to occur, the company must still pay for the benefit received.

Accrued liabilities, which are also called accrued expenses, only exist when using an accrual method of accounting. The concept of an accrued liability relates to timing and the matching principle. Under accrual accounting, all expenses are to be recorded in financial statements in the period in which they are incurred, which may differ from the period in which they are paid.

The expenses are recorded in the same period when related revenues are reported to provide financial statement users with accurate information regarding the costs required to generate revenue.

The cash basis or cash method is an alternative way to record expenses. But it doesn’t accrue liabilities. Accrued liabilities are entered into the financial records during one period and are typically reversed in the next when paid. This allows for the actual expense to be recorded at the accurate dollar amount when payment is made in full.

Types of Accrued Liabilities

There are two types of accrued liabilities that companies must account for, including routine and recurring. We’ve listed some of the most important details about each below.

Routine Accrued Liabilities

This kind of accrued liability is also referred to as a recurring liability. As such, these expenses normally occur as part of a company’s day-to-day operations. For instance, accrued interest payable to a creditor for a financial obligation, such as a loan, is considered a routine or recurring liability. The company may be charged interest but won’t pay for it until the next accounting period.

Non-Routine Accrued Liabilities

Non-routine accrued liabilities are expenses that don’t occur regularly. This is why they’re also called infrequent accrued liabilities. They aren’t part of a company’s normal operating activities. A non-routine liability may, therefore, be an unexpected expense that a company may be billed for but won’t have to pay until the next accounting period.

Journal Entry for an Accrued Liability

Accounting for an accrued liability requires a journal entry. An accountant usually marks a debit and a credit to their expense accounts and accrued liability accounts respectively.

This is then reversed when the next accounting period begins and the payment is made. The accounting department debits the accrued liability account and credits the expense account, which reverses out the original transaction.

When Do Accrued Liabilities Occur?

Accrued liabilities arise for a number of reasons or when events occur during the normal course of business. For instance:

• A company that purchases goods or services on a deferred payment plan accrues liabilities because the obligation to pay in the future exists.
• Employees may perform work for which they haven’t received wages.
• Interest on loans may be accrued if interest fees were incurred since the previous loan payment.
• Taxes owed to governments may be accrued because they are not due until the next tax reporting period.

At the end of a calendar year, employee salaries and benefits must be recorded in the appropriate year, regardless of when the pay period ends and when paychecks are distributed. For example, a two-week pay period may extend from December 25 to January 7.

Although they aren’t distributed until January, there is still one full week of expenses for December. The salaries, benefits, and taxes incurred from Dec. 25 to Dec. 31 are deemed accrued liabilities. These expenses are debited to reflect an increase in the expenses. Meanwhile, various liabilities will be credited to report the increase in obligations at the end of the year.

Accrued Liability vs. Accounts Payable (AP)

Accrued liabilities and accounts payable (AP) are both types of liabilities that companies need to pay. But there is a difference between the two. Accrued liabilities are for expenses that have not yet been billed, either because they are a regular expense that doesn’t require a bill (i.e., payroll) or because the company hasn’t yet received a bill from the vendor (i.e., a utility bill).

As such, accounts payable (or payables) are generally short-term obligations and must be paid within a certain amount of time. Creditors send invoices or bills, which are documented by the receiving company’s AP department. The department then issues the payment for the total amount by the due date. Paying off these expenses during the specified time helps companies avoid default.

Examples of Accrued Liability

As noted above, companies can accrue liabilities for many different reasons. As such, there are many different kinds of expenses that fall under this category. The following are some of the most common examples:

• Wage expenses: This is for work already performed by employees. The work is paid for in the next accounting period. This is common with employers who pay their employees bi-weekly, because a pay period may extend into the following accounting month or year.
• Goods and services: Some companies place orders and receive goods and services from their suppliers without paying for them immediately. As an accrued expense, the receiving company pays for these goods and services at a later date.
• Interest: A company may have an outstanding loan for which the interest isn’t yet due. The lender may require this expense.

What Is an Attorney-in-Fact?

An attorney-in-fact, also called an “agent,” is a person who is authorized to act on behalf of another person, known as the “principal,” typically to perform business or other official transactions. The principal usually designates someone as their attorney-in-fact by assigning them power of attorney, although a court may choose to assign it if the person being represented is incapacitated. The rules regulating power of attorney vary from state to state.

An attorney-in-fact is not necessarily a lawyer. Indeed, attorneys-in-fact don’t require any special qualifications at all. They can be a family member or close friend. Power of attorney may also be granted to more than one person. In such a case it should be stated whether a simple majority or unanimity is required for an action to be taken.

Attorney-in-Fact and Power of Attorney

An attorney-in-fact is a person who has been legally appointed to act on behalf of another person in a legal or business matter. The person appointing the attorney-in-fact is called the “principal,” and the attorney-in-fact is sometimes referred to as the “agent.”

An attorney-in-fact is usually appointed through a legal document called a power of attorney (POA). This document gives the attorney-in-fact the authority to make decisions and take actions on behalf of the principal in a variety of legal and financial matters. For example, an attorney-in-fact might be given the power to sign documents, manage a bank account, or sell property on behalf of the principal.

The attorney-in-fact is not required to be an actual lawyer, but they must act in the best interests of the principal and follow any instructions or guidelines set forth in the power of attorney. The attorney-in-fact is also required to keep the principal’s affairs confidential and to keep records of all actions taken on behalf of the principal.

It’s important to note that an attorney-in-fact is not the same as a lawyer or an attorney. A lawyer is a professional who is licensed to practice law, while an attorney-in-fact is simply a person who has been given the authority to act on behalf of another person.

Types of Power of Attorney

There are two basic types of power of attorney (POA) granted to attorneys-in-fact.

• General – General power of attorney grants the attorney-in-fact not only the right to conduct any business and sign any documents on behalf of the principal, but to make decisions, including financial decisions, on their behalf.
• Limited – Under a limited power of attorney assignment, also sometimes known as “special power of attorney,” the attorney-in-fact can be authorized to conduct certain transactions and make some decisions but not others. They are limited to the topics specified in the assigning document.

The Powers and Duties of an Attorney-in-Fact

If the attorney-in-fact is designated as a general power of attorney, they are allowed to conduct any actions that the principal would reasonably take. This means an attorney-in-fact would be able to open and close bank accounts, withdraw funds, trade stocks, pay bills, and cash checks—all on behalf of the principal.

With a limited power of attorney, the attorney-in-fact is granted broad powers in one or more areas but not others. For example, the attorney-in-fact could be authorized to carry out transactions at the direction of the principal but not to make business or financial decisions. It could also be narrower, such as only granting the right to sign documents related to the pending sale of a specific piece of property.

Attorney-in-Fact vs. Attorney-at-Law

As noted above, an attorney-in-fact need not be a lawyer. And another term for “lawyer” is “attorney-at-law.” If you have passed a state bar exam and are thus legally qualified in that state to prosecute and defend actions in a court on behalf of a client who has retained you, then you are an attorney-at-law.

Their functions are also different. An attorney-in-fact must make decisions for their principal, while an attorney-at-law makes no decisions for their client. Instead, they offer advice to their client and can represent them in the courtroom.

Durable Power of Attorney

A power of attorney generally terminates when a person dies, becomes incapacitated, or consciously chooses to revoke it via a notice filed in court. It can also end if it has a set date or its purpose has been accomplished. However, if it has been designated as a “durable” power of attorney, the attorney-in-fact retains the power of attorney should a principal become incapacitated. In such a situation the attorney-in-fact can continue to make decisions for the principal, including in matters of finance and healthcare.

Durable power of attorney can be granted ahead of time on condition that it only takes effect due to a triggering event, such as when the principal becomes incapacitated. This is also called a “springing” power of attorney. In this case it is a good idea to name one or more successors, as the original designee may be unavailable or, due to changed circumstances, be unwilling to assume the responsibility of becoming an attorney-in-fact.

The Bottom Line

An attorney-in-fact is someone who is granted authority to make decisions on behalf of another person, known as the “principal.” Such authority is granted via a written document providing power of attorney to the attorney-in-fact. Power of attorney can be either general or limited to certain specified transactions and topics. Typically, it only lapses if the principal dies, becomes incapacitated, or consciously revokes it through a notice filed in court. However, if it is a durable power of attorney, the attorney-in-fact will continue to serve if the principal becomes incapacitated.

Making a decision to appoint an attorney-in-fact should not be done lightly, and the person so designated should be a person or persons (you can appoint more than one) whom you trust. Family members and close friends are popular choices. If you appoint more than one, be sure to specify if decisions can be made by majority vote or must be unanimous.

What Is the Asset Coverage Ratio?

The asset coverage ratio is a financial metric that measures how well a company can repay its debts by selling or liquidating its assets. The asset coverage ratio is important because it helps lenders, investors, and analysts measure the financial solvency of a company. Banks and creditors often look for a minimum asset coverage ratio before lending money.

Understanding the Asset Coverage Ratio

The asset coverage ratio provides creditors and investors with the ability to gauge the level of risk associated with investing in a company. Once the coverage ratio is calculated, it can be compared to the ratios of companies within the same industry or sector.

It’s important to note that the ratio is less reliable when comparing it to companies of different industries. Companies within certain industries may typically carry more debt on their balance sheet than others.

For example, a software company might not have much debt while an oil producer is usually more capital intensive, meaning it carries more debt to finance the expensive equipment, such as oil rigs but then again has assets on its balance sheet to back the loans.

Asset Coverage Ratio Calculation

The asset coverage ratio is calculated with the following equation:

((Assets – Intangible Assets) – (Current Liabilities – Short-term Debt)) / Total Debt

In this equation, “assets” refers to total assets, and “intangible assets” are assets that can’t be physically touched, such as goodwill or patents. “Current liabilities” are liabilities due within one year, and “short-term debt” is debt that is also due within one year. “Total debt” includes both short-term and long-term debt. All of these line items can be found in the annual report.

How the Asset Coverage Ratio is Used

Companies that issue shares of stock or equity to raise funds don’t have a financial obligation to pay those funds back to investors. However, companies that issue debt via a bond offering or borrow capital from banks or other financial companies have an obligation to make timely payments and, ultimately, pay back the principal amount borrowed.

As a result, banks and investors holding a company’s debt want to know that a company’s earnings or profits are sufficient to cover future debt obligations, but they also want to know what happens if earnings falter.

In other words, the asset coverage ratio is a solvency ratio. It measures how well a company can cover its short-term debt obligations with its assets. A company that has more assets than it does short-term debt and liability obligations indicates to the lender that the company has a better chance of paying back the funds it lends in the event company earnings can not cover the debt.

The higher the asset coverage ratio, the more times a company can cover its debt. Therefore, a company with a high asset coverage ratio is considered to be less risky than a company with a low asset coverage ratio.

If earnings are not enough to cover the company’s financial obligations, the company might be required to sell assets to generate cash. The asset coverage ratio tells creditors and investors how many times the company’s assets can cover its debts in the event earnings are not enough to cover debt payments.

Compared to debt service ratio, asset coverage ratio is an extreme or last recourse ratio because the assets coverage is an extreme use of the assets’ value under a liquidation scenario, which is not an extraordinary event.

Special Considerations

There is one caveat to consider when interpreting the asset coverage ratio. Assets found on the balance sheet are held at their book value, which is often higher than the liquidation or selling value in the event a company would need to sell assets to repay debts. The coverage ratio may be slightly inflated. This concern can be partially eliminated by comparing the ratio against other companies in the same industry.

Example of the Asset Coverage Ratio

For example, let’s say Exxon Mobil Corporation (XOM) has an asset coverage ratio of 1.5, meaning that there are 1.5x’s more assets than debts. Let’s say Chevron Corporation (CVX)–which is within the same industry as Exxon–has a comparable ratio of 1.4, and even though the ratios are similar, they don’t tell the whole story.

If Chevron’s ratio for the prior two periods was .8 and 1.1, the 1.4 ratio in the current period shows the company has improved its balance sheet by increasing assets or deleveraging–paying down debt. Conversely, let’s say Exxon’s asset coverage ratio was 2.2 and 1.8 for the prior two periods, the 1.5 ratio in the current period could be the start of a worrisome trend of decreasing assets or increasing debt.

In other words, it’s not enough to merely analyze one period’s asset coverage ratio. Instead, it’s important to determine what the trend has been over multiple periods and compare that trend with like companies.