Accrual vs. Account Payable: An Overview
Both accrual and account payable are accounting entries that appear on a business' income statements and balance sheets. The difference between an accrual and an account payable is that an accrual is an accounting adjustment for items (revenue, expenses) that have been earned or incurred, but not yet recorded—that is, actually happened or been realized. An account payable is a liability to a creditor that denotes when a company owes money for goods or services.
Under the accrual accounting method, an accrual occurs when a company's good or service is delivered prior to receiving payment, or when a company receives a good or service prior to paying for it. For example, when a business sells something on predetermined credit terms, the funds from the sale is considered accrued revenue. The accruals must be added via adjusting journal entries so that the financial statements report these amounts.
Say a software company offers you a monthly subscription for one of their programs, billing you for the subscription at the end of every month. The revenue made from the software subscription is recognized on the company's income statement as accrued revenue in the month the service was delivered—say, February. At the same time, an accounts receivable asset account is created on the company's balance sheet. When you actually pay your bill in March, the accounts receivable account is reduced, and the company's cash account goes up.
There are several different types of accruals. The most common include goodwill, future tax liabilities, future interest expenses, accounts receivable (like the revenue in our example above), and accounts payable.
All accounts payable are actually a type of accrual, but not all accruals are accounts payable.
An account payable is a specific type of accrual. It occurs when a company receives a good or service prior to paying for it, and so incurs an obligation—owes money, in other words—to a supplier or creditor. Accounts payable represent debts that must be paid off within a given period, usually a short-term one (under a year). Generally, they involve expenditures related to business operations. They do not include employee wages or loan repayments.
Under the accrual accounting method, when a company incurs an expense, the transaction is recorded as an accounts payable liability on the balance sheet and as an expense on the income statement. 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. When the expense is paid, the account payable liability account decreases and the asset used to pay for the liability also decreases.
For example, imagine a business buys some new computer software, and 30 days later, gets a $500 invoice for it. When the accounting department receives the invoice, it records a $500 debit in the accounts payable field and a $500 credit to office supplies expenses. 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.
- Accrual and account payable refer to accounting entries in the books of a company or business.
- Accruals refer to earned revenues and incurred expenses that have not actually been realized.
- Accounts payable are short-term debts, representing goods or services a company has received but not yet paid for.