All companies have expenses, whether it’s buying supplies or paying the rent and employee wages. But different types of expenses require different accounting strategies, so it’s important to know which expenses to record where.
In this article, we’ll help you understand the definitions of accrued expenses and accounts payable, and walk through the key differences between them. Both are critical for keeping your balance sheet—and organization’s finances—in order.
Before we can get into describing the differences between accrued expenses and accounts payable, we’ll need to start with the basics of how each is defined—and how you should log them in your accounting ledger.
Accrued expenses are incoming expenses that have not yet been billed or invoiced, but the services have already been delivered. The purpose of accrued expense entries is to help keep track of debts as soon as the goods or services are delivered. These debts accrue—or build up—over time, and are a current liability for the company. Typically, accrued expenses are due within a year, at most, of the transaction date.
However, without an invoice immediately available, the exact amount due for certain accrued expenses may not be known. When this is the case, it’s best practice to log an estimate in your ledger that you’ll update once the invoice arrives.
What Do Accrued Expenses Look Like?
Although any expense without a bill or invoice would fall under this category, there are a few common types of accrued expenses:
Employee wages and salaries
Utility, phone and internet bills
What Is Accounts Payable?
Accounts payable entries, on the other hand, are records of expenses that have already been billed or invoiced, including anything bought on credit. These debts will be paid within one year at the most. (As such, they’re considered short-term or current liabilities.)
The main purpose of an accounts payable entry is to document payments that will be issued in the near future, in order to ensure third parties are paid on time and that bills are paid only once. This tracking of near-term expenses is a critical component of assessing an organization’s financial health.
In addition to avoiding redundant or missed payments, and their subsequent late fees, a well-run accounts payable department helps businesses secure early payment discounts—all of which helps bolster a company’s financial health and ensures that its cash flow is in order.
What’s the Difference Between Accounts Payable and Accrued Expenses?
As we mentioned above, accounts payable and accrued expenses are both current liabilities, but accounts payable entries have already been invoiced or billed and payment is due soon whereas accrued expenses have not yet been invoiced or billed and payment will become due in the future.
Because both accounts payable and accrued expenses are critical for a company’s finances, it’s important to understand the differences between the two. Here’s a breakdown of how accounts payable and accrued expenses differ in a few key areas:
- FREQUENCY OF OCCURENCE
- Accounts payable entries don’t typically happen on a set schedule. They include expenses that come up as needed, like replacing a broken printer or paying a consultant for a one-time workshop.
- Accrued expenses are often incurred monthly, like employee salaries and wages, rent and lease payments, and utility bills.
- TIMELINE FOR PAYMENT
- For accounts payable, payment occurs in the near future and is usually due within 12 months.
- For accrued expenses, payment is due at the end of the accounting period, which could be monthly, quarterly, or annually (fiscal year or calendar year), depending on how the company handles its expenses.
- STATUS OF INVOICE
- Expenses recorded in accounts payable have an invoice or bill on record.
- For accrued expenses, the company is aware of the expense and can plan for it, but they may not have received an invoice for it.
- WHO RECEIVES PAYMENT
- PRECISION OF LEDGER ENTRIES
- For accounts payable entries have a corresponding bill or invoice, so AP team members can record the exact amount due in the company’s ledger.
- For accrued expenses, it’s possible that the exact amount due might not be known. (For example, a monthly energy bill—which fluctuates month to month—would be an accrued expense.) In that case, an estimate is recorded in order to best represent the company’s current liabilities until the exact amount is known.
The Future of Accounts Payable and Accrued Expenses
It can be tricky for any company to know which expenses fall under accounts payable and which fall under accrued expenses. And though now you know the subtle differences between the two, there’s still the matter of actually processing those invoices—especially accounts payable invoices.
When it comes to handling physical and digital invoices, it takes time to enter that data accurately and quickly, to make sure third parties are paid on time and without errors.
That’s why many companies are pivoting to automation software to make their accounts payable processes more efficient and manageable. MHC Software offers solutions for your AP department that will save time, reduce data entry errors, avoid late payment fees, reduce physical papers to file, and more. Want to learn more? Visit our website today.