The key difference between accounts payable vs accrued expenses lies in when they are incurred. Both are current liabilities, but they arise under different circumstances and are accounted for in distinct ways.
- Accrued expenses involve estimated costs that have been incurred but not yet paid
- Accounts payable (A/P) represent documented liabilities arising from invoices received for goods or services.
Tracking both is crucial for producing accurate financial reporting and reflecting the company’s obligations to external parties.
Examples of Accrued Expenses vs Accounts Payable
Accrued expenses and accounts payable differ in how they are recorded, the frequency of occurrence, and the origin of liability among other things. Here are a few examples of each, along with the corresponding accounting entry.
Accrued Expenses Examples
Scenario | Accounting Entry | |
|---|---|---|
Accrued Salaries | Employees work during the last few days of the month, and their salaries for those days will be paid in the next month | Debit salary expense and credit accrued liabilities |
Accrued Interest | A company has a loan with interest payable in the middle of each quarter | Debit interest expense and credit accrued liabilities
|
Accrued Utilities | Services like electricity or water are used during the month, and the bills are received and paid in the following month | Debit utilities expense and credit accrued liabilities
|
Accrued Taxes | Taxes, such as income taxes, are incurred during the accounting period but are due for payment at a later date | Debit tax expense and credit accrued liabilities |
A company uses office space but pays rent on a quarterly basis | Debit rent payable and credit accrued liabilities | |
Accrued Commissions | Sales commissions are earned by employees during the month, but payment is made in the following month | Debit commission expense and credit accrued liabilities |
Accrued Bonuses | The company incurs bonus expenses during the year, and bonuses are paid out at the end of the fiscal year | Debit bonus expense and credit accrued liabilities |
A/P Examples
Scenario | Accounting Entry | |
|---|---|---|
Inventory Purchases | A retailer purchases goods on credit from a supplier to replenish its inventory | Debit inventory (asset) and credit accounts payable |
Office Supplies Purchases | A business buys office supplies on credit from its vendor | Debit office supplies (asset) and credit accounts payable |
Legal Services | The company receives legal advice or services and is invoiced for payment | Debit legal expenses and credit accounts payable |
A company leases office space and pays rent on a monthly basis | Debit rent expense and credit accounts payable | |
Service From Consultants | A business hires a consultant for a project, and the consultant invoices for payment later | Debit consulting expense and credit accounts payable |
Raw Materials Purchases | A manufacturing company buys raw materials on credit to use in the production process | Debit raw materials (asset) and credit accounts payable |
Equipment Purchases | The company acquires new equipment and agrees to pay the supplier over a period | Debit equipment (asset) and credit accounts payable |
Advertising Expenses | An advertising agency provides services, and the company is invoiced for the advertising campaign | Debit advertising expense and credit accounts payable |
For in-depth information, see our guides on:
How To Manage Your Accrued Expenses and Accounts Payable
Managing accrued expenses and accounts payable effectively is crucial for maintaining good financial health and ensuring timely payments to vendors and suppliers. Here are some tips to manage them:
- Accurate recording: Ensure that all accrued expenses and accounts payable are accurately recorded in your accounting system. This includes recording accrued expenses at the end of each accounting period based on estimates and recording A/P as invoices are received.
- Regular reconciliation: Reconcile your accrued expenses and accounts payable accounts regularly to ensure that the balances in your accounting records match the actual amounts owed. This helps identify any discrepancies and ensures that all liabilities are properly accounted for.
- Timely payment: Make timely payments to vendors and suppliers to avoid late fees, penalties, and damage to your relationships with them. Set up a system for reviewing and approving any payments and establish clear payment terms with vendors.
- Cash flow management: Monitor your cash flow regularly to ensure that you have enough funds to cover your accrued expenses and accounts payable. Forecast your cash flow to anticipate any cash shortages or surpluses and plan accordingly. For more on this, read our cash flow management tips.
- Vendor relationships: Maintain good relationships with your vendors and suppliers by communicating openly and transparently about payment terms and any issues that may arise. Negotiate favorable payment terms whenever possible to improve your cash flow.
- Prioritize payments: Prioritize payments based on due dates, payment terms, and the importance of the vendor relationship. Pay critical vendors and suppliers first to ensure that essential goods and services aren’t disrupted.
- Monitor aging reports: Review A/P aging reports regularly to identify overdue invoices and take action to resolve them promptly. Follow up with vendors on outstanding invoices and negotiate payment arrangements if necessary.
- Budgeting and forecasting: Include accrued expenses and accounts payable in your budgeting and forecasting processes to ensure that you allocate sufficient funds for upcoming payments and liabilities.
- Internal controls: Implement internal controls to prevent errors, fraud, and unauthorized payments. Segregate duties related to recording, approving, and making payments to ensure accountability and reduce the risk of misappropriation.
- Review and adjust: Review your accrued expenses and accounts payable processes regularly to identify areas for improvement and make necessary adjustments to streamline operations and reduce costs.
Frequently Asked Questions (FAQs)
A/P are not an expense but rather a liability to pay for an expense or inventory that has already been delivered. A/P is a liability on the company’s balance sheet, reflecting the obligation to settle these outstanding bills.
Billing and A/P are related concepts in the context of financial transactions, but they refer to different stages in the payment process. Billing is the process of generating and sending invoices to customers for goods sold or services provided while A/P refers to outstanding bills and invoices a company has received from its suppliers and vendors.
No, expenses aren’t considered liabilities in accounting. While both expenses and liabilities are components of a company’s financial statements, they represent different aspects of the business. Expenses are the costs incurred by a company in its day-to-day operations to generate revenue while liabilities represent the company’s financial obligations or debts.
Accrued expenses are often used when a company incurs costs in one accounting period but pays for them in a subsequent period. Examples include accrued interest, salaries, or utility bills.
Both accrued expenses and accounts payable represent obligations to pay in the future and impact the company’s cash flow directly when payments are made.
Bottom Line
Accrued expenses represent costs that are incurred gradually over time or at the occurrence of a particular event while A/P are liabilities that occur upon delivery of goods or services from vendors. Both accrued expenses and accounts payable represent unpaid expenses that are due in the short term.
