Accrued Expenses vs. Accounts Payable: What’s the Difference?

Accrued Expenses vs. Accounts Payable: An Overview

Companies must account for any expenses incurred in the past because these are costs that come due in the future. Accrual accounting is the general accounting term that covers any of these liabilities. Companies use two methods to track these accumulated expenses: accrued expenses or accounts payable.

Both are liabilities that businesses incur during their normal course of operations, but they’re inherently different. Accrued expenses are liabilities that build up over time and are due to be paid. Accounts payable are current liabilities that will be paid in the near future.

Key Takeaways

• Accrued expenses and accounts payable are two methods used by companies to track accumulated expenses under accrual accounting.
• Accrued expenses are liabilities that build up over time and are due to be paid.
• Accounts payable are liabilities that will be paid in the near future.
• The amount owed under an accrued expense can change because it may be an estimate. An account payable comes at a fixed amount.
• Accrued expenses are adjusted and recorded at the end of an accounting period. Accounts payable appear on the balance sheet when goods and services are purchased.

Accrued Expenses

Accrued expenses are payments that a company is obligated to make in the future for goods and services that were already delivered. A company receives a good or service and incurs an expense. This expense is recorded on the books but is paid later.

The term “accrued” means to increase or accumulate. Its unpaid bills increase when a company accrues expenses. They’re recognized under the accrual method of accounting at the time they’re incurred, not necessarily when they’re paid.

Also called accrued liabilities, these expenses are realized on a company’s balance sheet and are usually current liabilities. Accrued liabilities are adjusted and recognized on the balance sheet at the end of each accounting period. Any adjustments that are required are used to document goods and services that have been delivered but not yet billed.

Examples of accrued expenses include:

• Utilities that were used for the month but an invoice wasn’t received before the end of the period
• Wages that are incurred but payments have yet to be made to employees
• Services and goods that were consumed but no invoice has been received yet

Important

Balance sheets are financial statements that companies use to report their assets, liabilities, and shareholder equity. They provide management, analysts, and investors with a window into a company’s financial health and well-being.

Accounts Payable

The term “accounts payable (AP)” refers to a company’s ongoing expenses. These are generally short-term debts that must be paid off within a specified period, usually within 12 months of the expense being incurred. They’re short-term IOUs issued by billing parties. Companies that fail to pay these expenses run the risk of going into default: the failure to repay a debt.

An account payable is essentially an extension of credit from the supplier to the manufacturer. It allows the company to generate revenue from supplies or inventory so the supplier can be paid. Companies can pay their suppliers at a later date. This includes manufacturers that buy supplies or inventory from suppliers that extend the terms for the payment.

Accounts payable are often simply called payables. They might not be due for another 30, 60, or 90 days. They’re considered current liabilities. Companies recognize their payables on the balance sheet when they purchase goods or services on credit. This requires a double entry on the general ledger:

• A credit to the company’s accounts payable upon receipt of the invoice
• An offsetting debit under the expense account for the credit purchase

Key Differences

Accrued expenses are the total liability that’s payable for goods and services consumed or received by the company. All companies have accrued expenses, but they reflect costs for which an invoice or bill hasn’t yet been received. Accrued expenses can sometimes be an estimated amount of what’s owed as a result. This is later adjusted to the exact amount when the invoice has been received.

Accounts payable is the total amount of short-term obligations or debt that a company has to pay to its creditors for goods or services bought on credit. The vendor’s or supplier’s invoices have been received and recorded. Payables should represent the exact amount of the total owed from all the invoices received.

Some other differences between these two expenses include:

• Timing: The major difference in identifying these two liabilities is their timing. Accounts Payable are recorded when an invoice is issued by a supplier. Accrued expenses are booked at the end of the accounting period to recognize the expenses that have been incurred but not yet invoiced.
• Recipient: Companies pay accrued expenses to their employees, property owners, and banks. Salaries, rent, and interest are common accrued expenses that companies owe. Accounts payable are owed to creditors, including suppliers for goods and services purchased on credit.
• Occurrence: Accrued expenses tend to be regular occurrences, such as rent and interest payments on loans. Accounts payable only occur when a business makes a purchase on credit.”

Accrued Expenses vs. Accounts Payable Example

Let’s say a company pays salaries to its employees on the first day of the following month for services received in the prior month. An employee who worked for the entire month of June will be paid in July. The accrued expenses from the employees’ services for December will be omitted if the company’s income statement at the end of the year recognizes only salary payments that have already been made.

Now, imagine that a business receives a $500 invoice for office supplies. It records a $500 credit in the accounts payable field and a $500 debit to office supply expense when the AP department receives the invoice. Anyone who looks at the balance in the accounts payable category will see the total amount that the business owes all of its vendors and short-term lenders.

The company then writes a check to pay the bill so the accountant enters a $500 credit to the checking account and enters a debit for $500 in the accounts payable column.

Explain Like I’m 5

Consider a company that buys materials from a supplier to make its shoes but doesn’t pay for them right away. There are two ways the company can keep track of this expense: accrued expenses or accounts payable.

Both of these mean that a business needs to pay its supplier, but each happens at different times and in different ways. Accrued expenses mean when a company uses something, like its materials, but hasn’t gotten a bill yet. The company writes it down so it remembers to pay it later.

Accounts payable is when the company has gotten the bill, such as an invoice, and knows exactly how much it has to pay and when. The main difference between the two is whether the bill has arrived or not. If it hasn’t, it’s an accrued expense; if it has, it’s accounts payable.

When Should You Accrue an Expense?

Companies usually accrue expenses on an ongoing basis. They’re current liabilities that must typically be paid within 12 months. This includes expenses like employee wages, rent, and interest payments on debts that are owed to banks.

How Are Accrued Expenses Recorded?

Accrued expenses are listed on a company’s balance sheet. They should appear at the end of the company’s accounting period. Adjustments are made using journal entries that are entered into the company’s general ledger.

What Are Examples of Accounts Payable?

Accounts payable refers to any current liabilities that are incurred by companies. Examples include purchases made from vendors on credit, subscriptions, or installment payments for services or products that haven’t been received yet. Accounts payable are expenses that come due in a short period, usually within 12 months.

Is Rent an Account Payable?

Rent is generally not considered part of accounts payable. Companies incur rent as an accrued expense because this is a cost that’s paid consistently and monthly.

The Bottom Line

Companies use two methods to track accumulated expenses: accrued expenses or accounts payable. Both are liabilities that businesses incur during their normal course of operations, but they’re different. Accrued expenses are liabilities that build up over time and are due to be paid. Accounts payable are current liabilities that will be paid in the near future.