Accrued Expenses vs. Accounts Payable: Key Differences Explained

Companies don’t pay off their expenses as soon as they occur. These expenses get accrued over time as accrued expenses or accounts payable. These expenses are considered current liabilities and are paid off within a set time frame, generally within 12 months of incurring them. 

What are accrued expenses?

Accrued expenses are expenses incurred over time but haven’t been paid yet. These are generally unbilled expenses that have been utilized over a while. Accrued expenses are noted down in the balance sheet under current liabilities. 

For example, consider a company’s employees are paid on the 1st of every month for their previous month’s services. Therefore, upon preparing the balance sheet for the current financial year, employee wages for December would be covered under accrued expenses since they haven’t been paid yet. 

How are accrued expenses accounted for?

Accrued expenses are often recurring costs for a company, such as rent, utilities, or employee salaries. Accrued expenses are accounted for by calculating and estimating the amount due to your company’s creditors by making assumptions. Therefore, the accrued expenses mentioned in a balance sheet are typically an estimate of the amount owed to your creditors. This amount is confirmed and modified once a bill is received. 

Accrual accounting follows the matching principle, i.e., businesses must record their expenses alongside their revenues earned. 

Accrual accounting is a generally accepted accounting principle and is mandatory for companies with revenue above $25 million in the past three years or companies that sell on credit. Smaller companies might opt to do cash-based accounting instead. 

What are accounts payable?

Accounts payable are current liabilities owed to a company’s vendors for purchases made on credit. The vendor generally billed these purchases, and they are due over a set payment period. 

For example, let’s assume a car manufacturing company orders parts from its suppliers on credits. After delivery on 1st December, the supplier sends an invoice with a 60-day payment period. The company chooses to pay the supplier after 40 days. Since, by 31st December, the invoice hasn’t been paid yet, the expense is accounted for under accounts payable in the balance sheet. 

How are accounts payable accounted for?

Accounts payable is a liability account recorded in the balance sheet under current liabilities. Accounts payable are accounted for in the general ledger using the double accounts payable journal entry method. This method requires you to mark the transaction as a debit against the relevant expense account and as a credit to the accounts payable account when an invoice is received from the vendor for supplies purchased on credit. This is done after verifying the invoice's validity to prevent invoice fraud. 

When the invoice is finally paid to the vendor, you need to debit the amount from the accounts payable account, as your liability has reduced, and credit it into the vendor’s bank account or as cash, depending on the mode of payment. 

Differences between accrued expenses and accounts payable

Despite being accounted for under current liabilities in the balance sheet, accrued expenses and accounts payable have some notable differences. 

Timing of occurrence

The timing of occurrence is an essential distinction between accounts payable and accrued expenses. While accrued expenses are accounted for when the services or goods involved have been received or utilized, accounts payable are accounted for when an invoice is billed to the company. 

Accuracy

Accrued expenses are an estimated figure of the amount a company owes its creditors, calculated by a combination of guesswork and actual accounting. Accounts payable debt is an exact figure that is accounted for using double journal entries with the help of invoices received. 

Timing of settlement

Accounts payables are settled relatively quickly depending on the payment period set by the vendor. Accrued expenses, however, are generally paid off before the following financial statement is generated. 

Accounting in financial statements

Accounts payable are only recorded in the balance sheet, whereas accrued expenses are also accounted for in the income statement under costs. 

Impacts of not settling accrued expenses and accounts payable on time

Not settling your debts on time is harmful to your company. Here are some negative impacts of not settling your accounts payable and accrued expenses on time. 

Impact creditworthiness

Creditworthiness refers to a company’s suitability to receive credit. Not paying off your accounts payable and accrued expenses on time can impact your company’s creditworthiness, making obtaining loans and other supplies on credit more challenging.

Reduce profitability

Expenses accruing over time will increase your liabilities and costs in your financial statements. This will impact your company’s profitability. 

Strain vendor relationships

Not paying your vendors on time can harm your vendor relationships and reduce your negotiation power while negotiating a contract. You would end up with strict payment terms and less flexibility while paying, leading to financial losses for your company. 

Non-compliance and legal issues

Not paying your debts on time can also make you end up in legal trouble with your creditors. Failing to pay back loans on time or missing payments to vendors can land you in compliance issues with your creditors, harming your company’s finances and reputation. 

How automation can prevent these issues

Employing automation tools such as AP automation or spend management software can help you avoid the issues mentioned earlier and protect your company. Most AP automation software ensures that your bills are paid on time and synced to your accounting system, providing accurate balance sheet preparation. ClearTech, for instance, automatically creates payment runs based on invoice due dates and vendor payment mode, ensuring money is credited to your vendor’s account on time. It also lets you view and download invoices and payment history, making year-end close easier for your accountants.

Conclusion

Accounts payable and accrued expenses are part of current liabilities in a balance sheet. Accrued expenses are goods or services that have been utilized but haven’t been billed yet. Some examples of accrued expenses are office space rent, employee wages, and interest on business loans. Accounts payable refers to the amount owed to your vendors for goods or services purchased on credit that have been billed but are due for a later date. Examples of accounts payable purchases are raw materials, consultancy services, and SaaS purchases. Accounts payable are generally paid off quicker than accrued expenses and are not accounted for in a company's income statement. Paying off your debts on time is essential for your company’s well-being. Automating your payables process can help aid in timely payments and improve your financial records. 

FAQs

• What is the difference between accrued expenses and accounts payable?

Accrued expenses are accumulated over a period that is yet to be billed for or paid. Accounts payable are payments due to vendors for goods or services purchased on credit due at a later date. 

• Is accrued expenses a current liability?

Accrued expenses are classified as current liabilities in the balance sheet. They are also accounted for in income statements as expenses. 

• What is the difference between a creditor and accrual?

Both accrual and creditor are accounted for in the balance sheet under liabilities. However, accruals are dues that haven’t been billed but have been supplied to the company, whereas creditors have already been billed but may be due later. 

• What are accrued expenses with examples?

Accrued expenses are already incurred by the company but are not billed or paid for. For example, if a company pays its employees at the beginning of a month for their previous month’s services, the salary owed for December would come under accrued expenses in that year’s balance sheet.