Accrued Expenses vs. Accounts Payable: An Overview
Companies must account for expenses they have incurred in the past, or which will come due in the future. Accrual accounting is a method of tracking such accumulated payments. Accrued expenses are those liabilities which have built up over time and are due to be paid. Accounts payable, on the other hand, are current liabilities that will be paid in the near future. Below, we go into a bit more detail describing each type of balance sheet item.
Accrued expenses (also called accrued liabilities) are payments that a company is obligated to pay in the future for which goods and services have already been delivered. These types of expenses are realized on the balance sheet and are usually current liabilities. Accrued liabilities are adjusted and recognized on the balance sheet at the end of each accounting period; adjustments are used to document goods and services that have been delivered but not yet billed.
Examples of accrued expenses include:
- Utilities used for the month but an invoice has not yet been received before the end of the period
- Wages that are incurred but payments have yet to be made to employees
- Services and goods consumed but no invoice has been received yet
The term "accrued" means to increase or accumulate. When a company accrues expenses, this means that its portion of unpaid bills is increasing. Following the accrual method of accounting, expenses are recognized when they are incurred, not necessarily when they are paid.
Accounts payable (AP), sometimes referred simply to as "payables," are a company's ongoing expenses that are typically short-term debts which must be paid off in a specified period to avoid default. They are considered to be current liabilities because the payment is usually due within one year of the date of the transaction. Accounts payable are recognized on the balance sheet when the company buys goods or services on credit.
[Important: Accrued expenses are realized on the balance sheet at the end of a company's accounting period when they are recognized by adjusting journal entries in the company's ledger.]
Accounts payable is the total amount of short-term obligations or debt a company has to pay to its creditors for goods or services bought on credit. On the other hand, accrued expenses are the total liability that is payable for goods and services that have been consumed by the company or received but have not yet been billed.
Accrued Expenses vs. Accounts Payable: Example
For example, consider a company that pays salaries to its employees on the first day of the following month for the services received in the prior month. So, an employee that worked in the company all of June will be paid in July. At the end of the year on December 31st, if the company’s income statement recognizes only salary payments that have been made, the accrued expenses from the employees’ services for December will be omitted.
By contrast, imagine a business gets a $500 invoice for office supplies. When the AP department receives the invoice, it records a $500 debit in the accounts payable field and a $500 credit to office supply expense. As a result, if anyone looks at the balance in the accounts payable category, they will see the total amount 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 debit to the checking account and enters a credit for $500 in the accounts payable column.
- Accrued expenses are those liabilities which have built up over time and are due to be paid.
- Accrued expenses are considered to be current liabilities because the payment is usually due within one year of the date of the transaction.
- Accounts payable are current liabilities that will be paid in the near future.