What is an accrued expense vs accounts payable?

Accrued expenses represent costs incurred but not yet paid, like wages earned by employees that haven’t been disbursed. Accounts payable, on the other hand, are obligations to pay suppliers for goods or services that have already been received, but the payment hasn’t yet been made. Knowing how to distinguish between these two can help you maintain accurate financial records and make better-informed decisions.

What Are Accrued Expenses?

Accrued expenses are costs that your company has incurred during a specific period but have not yet paid. These expenses are recognized on your income statement when they are incurred, even though the cash hasn’t left the company’s account. Common examples include salaries and wages earned by employees that will be paid in the next pay period, interest on loans that will be paid later, or utilities that have been used but the bill hasn’t been received yet.

For instance, if your company’s employees work during the last week of December, but payday falls in January, the wages for that week would be recorded as an accrued expense in December’s financial statements. This ensures that the expense is matched with the revenue generated during the period it was incurred, providing a more accurate picture of your company’s financial performance.

Other examples of accrued expenses include the following: 

• Interest that has accrued on loans or debt but has not been paid by the end of the period.
• Rent for office space, buildings, or equipment that is due but not yet paid.
• Consulting, legal, or accounting services provided but not yet billed.

What Are Accounts Payable?

Accounts payable, on the other hand, refers to amounts your company owes to its suppliers for goods or services it has already received. This liability is recognized when the invoice from the supplier is received, and it remains on the company’s balance sheet until the payment is made. Examples of accounts payable include payments due to vendors for goods and services the company has received but not yet paid for.

For example, if a business receives a shipment of raw materials on December 15th with payment due in 30 days, the amount owed will be recorded as an account payable. This entry reflects the company’s obligation to pay its supplier, even though the cash hasn’t yet been transferred.

Other examples of accounts payable include the following: 

• Invoices received for office supplies that have been delivered but not yet paid.
• Payments due for purchased inventory that has been delivered and invoiced.
• Outstanding bills for professional services like legal, accounting, or consulting that have been completed and invoiced.

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

Accrued expenses and accounts payable both represent obligations that a company must pay, but they differ in several key ways:

• Nature of the liability
  • Accrued expenses: These are costs that the company has incurred for goods or services it has already used but hasn’t yet received an invoice for. Since the exact amount owed might not be known immediately, accrued expenses are often estimated and later adjusted once the invoice is received.
  • Accounts payable: This represents the total amount owed to suppliers or creditors for goods or services that have already been received, and for which an invoice has been issued. Accounts payable reflect the exact amount owed as specified in the received invoices.
• Recipient
  • Accrued expenses: These liabilities are typically owed to employees, property owners, or financial institutions. Common examples include salaries, rent, and interest on loans.
  • Accounts payable: These are amounts owed to external creditors, primarily suppliers or vendors, for goods and services purchased on credit.
•  Occurrence
  • Accrued expenses: These are recurring costs that occur regularly, such as monthly rent or periodic interest payments on loans.
  • Accounts payable: This liability arises when a business makes a purchase on credit. It’s recorded when the goods or services are received, and the invoice is received from the supplier.
• Accounting treatment
  • Accrued expenses: Recorded as current liabilities on the balance sheet at the end of the accounting period, reflecting expenses that have been incurred but not yet paid.
  • Accounts payable: Directly recorded as accounts payable on the balance sheet when the company receives an invoice from a supplier, representing the exact amount owed.
• Realization
  • Accrued expenses: These are recognized at the end of the accounting period as they represent costs incurred but not yet invoiced.
  • Accounts payable: Recognized immediately when an invoice is received, marking the point at which the payment obligation is realized.

Understanding these differences is essential for accurately tracking and managing a company’s short-term liabilities, ensuring that financial statements provide a true reflection of the company’s financial obligations.

Summary

• Accrued expenses and accounts payable both represent liabilities but differ in timing and recognition. Accrued expenses are incurred costs that haven’t yet been invoiced, while accounts payable are obligations for goods or services received and invoiced.
• Accrued expenses include costs like employee wages, utility bills, and interest on loans that are recognized before payment is made or an invoice is received, often requiring estimation.
• Accounts payable involve amounts owed to suppliers for goods or services that have been received and invoiced, such as office supplies, raw materials, and professional services.
• Accounting treatment differs: accrued expenses are recognized at the end of the accounting period, while accounts payable are recorded when the invoice is received.
• Understanding the difference between these two is critical for accurate financial reporting and effective cash flow management.