Under accrual-based accounting, companies need to have ways of tracking expenses they’ve incurred, but have yet to pay for in cash.
This way, companies can have a better understanding of their financial obligations at any point in time, which helps to guide current and future spending decisions.
Accounts payable and accrued expenses are two ways to track such amounts.
So, what is the difference between accounts payable and accrued expenses? Continue reading through this guide as we discuss the key differences between these accounting concepts.
Accrued expenses vs accounts payable
Accrued expenses and accounts payable both represent funds that a company owes to a third party. As such, they both show up as current liabilities on the balance sheet.
However, there are subtle differences between these two terms, which impact how they’re treated by accounting teams.
Here’s a closer look at the definition of each term:
- Accrued expenses: These are expenses the company has incurred but has yet to pay. They occur when the company receives goods or services, which, under accrual-based accounting, calls for teams to record the expense, even if cash has not yet exchanged hands.
- Accounts payable: These are expenses that the company has been billed for, representing what it owes to vendors or suppliers. It generally encompasses anything the company has bought on credit, with payment due within one year or less.
What are accrued expenses?
As the name might imply, accrued expenses accrue, or build up, over time. They are recorded upon the receipt of goods or services, whether or not the company received a bill or invoice.
Recording accrued expenses helps businesses stay on top of their obligations and properly track expenses during a given period, regardless of when the cash payment is made.
They are a short-term liability, meaning they show up on a company’s balance sheet, unlike other expenses that are reported on the income statement.
Recording accrued expenses
When a business incurs an expense before paying or receiving an invoice, accountants will make a journal entry debiting the relevant expense account to increase the balance, and crediting the accrued liabilities account to represent an increase to the short-term debt the company owes.
Let’s say a salaried employee at a company has earned $2,000 during the current pay period, but won’t be paid until the next payroll run the following week. Here’s what the corresponding journal entry would look like for the company:
This way, the company follows the timing recognition principle, meaning they record the wage expense in the same period that they received the benefit of the work. However, it still shows the company’s obligation to pay the designer at a future date.
What are accounts payable?
Essentially, the balance of accounts payable represents the amount of outstanding invoices the company owes its vendors and suppliers at any given moment.
Like accrued expenses, keeping accurate records of accounts payable helps businesses understand their obligations and plan for future outgoing payments.
It’s also useful for ensuring vendors and suppliers are paid on time and helps businesses avoid making duplicate payments.
They are also considered short-term liabilities and are reported on the company’s balance sheet.
Recording accounts payable
When a company receives an invoice from a vendor or supplier, it needs to update its accounts payable balance accordingly.
Assuming the goods are delivered with the invoice, the company would debit the inventory account to show an increase in its value, while crediting the accounts payable account to show that the company’s obligations have increased as well.
Let’s say a retail store has purchased $4,000 worth of merchandise from a supplier. When the goods are delivered, the supplier provides the store with the corresponding invoice. Here is the journal entry that would need to be made:
This journal entry helps the company keep its financial records accurate, representing that it has $4,000 worth of goods to sell, but also owes its supplier $4,000 by the payment terms included on the invoice.
Key differences in accrued expenses vs. accounts payable
Here is a quick comparison of the key differences between accrued expenses and accounts payable:
- Invoicing: Accrued expenses are recorded before a company receives an invoice. In contrast, the accounts payable process is triggered upon receiving an invoice from a vendor or supplier, dictating how much the company owes and when payment is due.
- Recognition: Accrued expenses are recognized when the company receives the benefits of the goods and services, or at the period-end for financial reporting purposes. On the other hand, accounts payable are recognized when the company receives an official invoice.
- Specificity: Accrued expense amounts may be estimated based on past orders, while accounts payable amounts come directly from what the company has been billed for.
- Balance sheet impact: Both are reported as short-term or current liabilities on the balance sheet. Accrued expenses may be grouped together with other short-term debts and labeled as “accrued liabilities.” However, accounts payable are often reported as their own line item.
Practical examples: accrued expenses vs. accounts payable
To get a better understanding of how accrued expenses and accounts payable differ, here are two real-world examples for a restaurant, ABC Cafe, that illustrate how a company may need to record and track each type.
Real-world scenario for accrued expenses
ABC Cafe has hired a cleaning company to come in and clean the restaurant each day after it closes. They charge $100 for each day of cleaning, and only send invoices to the restaurant owner once a month.
At the end of the first week of the month, ABC Cafe has incurred $700 of cleaning service fees. Even though they won’t receive an invoice from the cleaning company for a few more weeks, they still want to update their accounting records to represent what they will eventually owe.
Here’s the journal entry they could record:
Real-world scenarios for accounts payable
At the same time, the restaurant purchases $2,500 worth of food supplies from a distributor. When the distributor delivers the food, it also provides the invoice with net 30 payment terms.
Upon receiving the food and the invoice, ABC Cafe can record a journal entry to update the balance of its inventory and accounts payable accounts.
Why understanding the difference matters
Even though both accruals and accounts payable impact the balance sheet in similar ways, it’s still important for teams to understand the differences between them to ensure expenses and obligations are accurately tracked and reported.
Teams should understand that they may not be able to rely on vendor invoices alone to track their obligations. Having standard processes to identify which expenses have accrued without a formal invoice makes it easier for teams to close the books at the end of the period.
Staying on top of both accruals and payables gives teams a clearer picture of their financial standing and cash flow needs. It helps them time future payments to avoid a cash flow shortage and create more predictability around outflows.
Streamline the accounts payable process with BILL
A well-run accounts payable department provides teams with up-to-date financial records, while also ensuring on-time and accurate payments to vendors and suppliers.
However, as companies scale and expand their vendor relationships, it becomes increasingly difficult to manually keep track of all invoicing activities without letting some slip through the cracks.
With an automated AP solution like BILL, making business payments becomes much easier. Teams can quickly import invoices into BILL with little or no manual entry required, with approvals automatically routed to the appropriate team members to speed up the payment process.
Start using BILL today to see how it can boost your efficiency.
Frequently asked questions
What is the difference between accounts payable and accrued expenses?
The difference between an accrual and an account payable typically comes down to timing and invoicing, though they both represent short-term debt. Accruals are typically recorded when a company incurs an expense, even if they have not received an invoice for it. On the other hand, accounts payable are typically recorded when a company is billed for goods or services from a vendor or supplier.
What are examples of accrued expenses?
Accrued expenses accumulate over time, which companies expect to pay even if they don’t receive a formal invoice. Common examples include wages and salaries, utilities, rent, and any other fees for services rendered, but not yet invoiced.
When to record accrued expenses?
Accrued expenses are often recorded at the end of the month, quarter, or year when financial statements are being prepared. This helps companies accurately capture their obligations, even if they have not been formally billed. They can also be recorded as soon as goods are delivered or services are rendered to recognize the expense.
