Money Matters

What are accrued expenses and how do they differ from accounts payable?

Accrued expenses and accounts payable are both debts your business owes, but they are managed in distinctly different ways. Read on to learn how each affects your financial reporting and cash flow.

Published September 1, 202611 min read Share

When you’re managing a business, keeping track of your finances can be a bit like juggling. 

There are a lot of concepts and processes to wrap your head around and stay on top of. Some of these can seem very similar but may, in fact, have quite distinctly different meanings and implications. 

Accrued expenses and accounts payable are examples of two financial terms that are helpful to understand. 

Both are liabilities, which means they represent money your business owes. But they play different roles in how your company operates and reports its financial health. 

In this article, we explain what accrued expenses are, how they differ from accounts payable, and why each of these terms matter to your business’s financial planning and cash flow. 

Whether you’re a growing company taking the next step into more complex accounting or just trying to get a clearer picture of how your finance team handles your books, this guide can help.

Key takeaways

• Accrued expenses are costs your business has incurred but not yet paid or been invoiced for—like wages or interest—recorded within each accounting period. 
• Accounts payable represents money owed to suppliers for goods or services already received, with payment due within a defined period, typically 30 to 90 days. 
• The key differences lie in timing and recognition. AP is triggered by an invoice, while accrued expenses are recorded regardless of whether an invoice has arrived. 
• Both affect cash flow differently; AP creates short-term obligations, while accrued expenses can build up over time and strain liquidity if not closely monitored. 

Here’s what we cover:

What are accrued expenses?

Accrued expenses, also known as accrued liabilities, are expenses your business has already incurred but not yet paid for. They can build up over time and are considered “current liabilities,” as you’d typically need to pay them within a year—but possibly within a much shorter period. 

These expenses are often linked to ongoing costs your business needs to account for consistently, such as salaries, taxes, and interest on business loans. 

Or they might be goods and services that you’ve received but not yet been invoiced for by the supplier. 

For example, the wages your employees earn this month may not be paid until the 1st of the following month. These wages should be recorded as accrued expenses in the current period. 

Otherwise, when you get to the end of your financial year, the wages you owe your staff for the last 30 days will be left off your financial statement for those 12 months. 

It’s important that accrued expenses are properly recorded as liabilities in your books as soon as they’re incurred. 

You’ll need to track and account for these expenses within each accounting period to get an accurate view of your finances at any given time.

What is accounts payable?

Accounts payable (AP) is also a current liability, representing money your business owes to suppliers or vendors for goods and services received but not yet paid for. 

While both accounts payable and accrued expenses can be short-term debts, AP is due within a defined period specified on an invoice, such as 30, 45, 60, or 90 days. 

This allows your company to take possession of goods or services immediately but defer payment for a period defined by your supplier’s payment terms. 

It functions similarly to a line of credit, where your company gets to use the products or services from the supplier without having to pay upfront. 

For example, suppose your business orders raw materials from a supplier, who issues an invoice with payment terms of 30 days. 

The amount owed will be recorded as accounts payable in your books. Your business can use the materials immediately, but you have up to 30 days to pay for them. 

The advantage here is that your business can generate revenue from the goods before paying for them, which helps with cash flow management. 

You might also be able to negotiate longer payment terms with suppliers for better liquidity. This can be particularly useful if you’re waiting for customers to pay for products or services.

Accrued expenses vs. accounts payable

Looking at accrued liabilities vs accounts payable, the key differences lie in how they are recognized, their timing, and their impact on your business’s cash flow. 

Let’s break this down in more detail.

Balance sheet recognition/timing

The timing of recognition is one of the primary differences between accrued expenses and accounts payable. 

• Accounts payable is recognized when you receive the invoice for goods, services, or materials that are purchased on credit. For example, if you buy inventory on credit, you’d record it in accounts payable once you receive the invoice from your supplier. The expense isn’t paid yet but it’s due at some point soon, typically within 30 to 90 days. 

• Accrued expenses are recorded by the end of an accounting period, regardless of when the actual invoice is received. So, you’re accounting for costs such as employee wages, utilities, and interest that have been incurred during the accounting period but won’t be paid until a later date. This is often done to match expenses with the revenues they helped generate in the same period, ensuring your financial statements are accurate and reflect true profitability. 

Let’s look at an example for each: 

• Accounts payable: if you receive a shipment of materials from a vendor with a 30-day payment term, you record the expense in accounts payable once you get the invoice, even though you haven’t paid it yet. The liability remains until the payment is made. 
• Accrued expense: this could be any utilities, goods, or services your business has received or used in a month but hasn’t been billed for yet. It could also be accrued interest on loans where the payment isn’t due yet. These types of costs accumulate during the accounting period, meaning you need to recognize them even though the actual payment won’t happen until later.

Cash flow impact

Both accrued expenses and accounts payable have implications on your cash flow, but they impact it differently.

Accounts payable

This is typically a short-term obligation. The payments are due within a relatively short time frame, usually between 30 and 90 days. 

Since accounts payable represents the amount owed to suppliers for goods or services already received, it directly impacts your short-term cash flow. 

Your business will need to make sure there’s enough cash to settle accounts payable when they become due. 

However, AP debt does provide some breathing room, allowing you to use the purchased goods to generate revenue before the payment is due.

Accrued expenses

They typically represent costs that accumulate over a longer period and need to be paid once the accounting period ends. 

The challenge with accrued expenses is that they can sometimes build up, especially if they aren’t closely monitored. 

Say your business accrues a significant amount of wages or taxes but doesn’t have the cash flow to pay them when they come due. This could cause a strain on your liquidity. 

The key is to ensure you’re accounting for these expenses as they accrue. That way, you can prepare for the larger lump-sum payments that may arise at the end of the accounting period. 

In short, while accounts payable has a short-term cash flow impact, accrued expenses may affect your business more long term, especially if they accumulate over several periods.

Other accounting terms commonly confused with accrued expenses

Accrued expenses share similarities with several other accounting concepts, which can make them easy to mix up in day-to-day bookkeeping.

Understanding what sets each one apart from the rest will help you record and report your finances accurately.

Term	Balance sheet classification	Key distinguishing factor versus accrued expenses
Outstanding expenses	Liability	A known, specific amount that’s due but unpaid; no estimation involved, unlike accrued expenses.
Prepaid expenses	Asset	Paid in advance for something not yet received; on the opposite timing and balance sheet side from accrued expenses.
Provisions	Liability	Involves genuine uncertainty about amount or timing; accrued expenses are typically known with reasonable precision.

How to record an accrued expense

Recording an accrual involves two separate journal entries: one to recognize the expense when it’s incurred, and a second to reverse it once the actual invoice or payment comes through.

This two-step journal entry process keeps your books accurate without double-counting the cost.

The initial journal entry

When you recognize an accrued expense, you make a double entry that follows standard bookkeeping principles: you debit the relevant expense account and credit an accrued liabilities account.

The debit increases your expenses for the period, reflecting the cost you’ve actually incurred.

The credit increases your liabilities, reflecting the obligation you now owe. Since you typically won’t have an exact invoice amount yet, this entry is often based on a reasonable estimate.

For example, you might calculate one month’s worth of accrued interest on a loan, even though the actual bill won’t arrive until a later date.

This entry is dated as of the last day of the accounting period, regardless of when the invoice eventually arrives or the payment is made.

That date is what ensures the expense lands in the correct period on your financial statements.

The reversing entry

Once the next accounting period begins, you reverse the original accrual entry. You are basically flipping the debit and credit to cancel it out.

This step matters because when the actual invoice arrives (or payment is made), you’ll record that transaction normally, in full.

Without a reversing entry, you’d end up with the cost counted twice: once as an estimate in the prior period, and again as the real transaction in the current one.

Many accounting software solutions can generate reversing entries automatically once the original accrual is flagged, which removes the risk of forgetting this crucial step.

Advantages of keeping an accrued expense journal

Maintaining a dedicated accrued expense journal, rather than recording costs only when you’re invoiced or when cash changes hands, brings several practical benefits for your business.

• A more accurate financial picture: accrued expenses are recorded in the period they’re actually incurred. So, your financial statements reflect your true costs and profitability for that period, rather than an incomplete picture based only on what’s been paid or billed so far.
• Better spending visibility: an accrued expense journal gives you a running, itemized view of costs building up in the background, like wages, interest, utilities, and other obligations. Nothing slips through unnoticed simply because an invoice hasn’t landed yet.
• Improved budgeting and cash flow planning: because you’re tracking these costs as they accumulate, you can anticipate upcoming lump-sum payments (like a large payroll run or a quarterly interest payment) well before they’re due, rather than being caught off guard.
• Stronger negotiating position with suppliers and vendors: a clear, ongoing record of what your business owes, and when, means you have full visibility into your obligations rather than reacting to bills as they arrive. This can give you the leverage and confidence to negotiate more favorable payment terms.
• More reliable trend analysis and forecasting: consistently tracked accrued expenses make it easier to spot patterns in recurring costs over time, which in turn supports more accurate forecasting of future expenses and profits.
• Consistency across reporting periods: recognizing costs as they’re incurred, rather than when they’re paid, smooths out the lumpiness that cash-based tracking can create. This way, month-over-month or quarter-over-quarter comparisons are more meaningful.

Track your liabilities with pinpoint accuracy

You must track both accrued and accounts payable expenses closely to avoid cash flow issues and stay prepared for upcoming payments. 

The last thing you want is to be caught off guard when a large accrued expense comes due, or find yourself scrambling to pay your suppliers’ invoices on time. 

Investing in automated accounts payable software can be an effective way to manage all your current liabilities and maintain your business’s financial health. 

These solutions can streamline your financial processes, seamlessly forecast cash flow, track liabilities, and help you stay on top of invoicing. 

They can provide a comprehensive view of your financial position, with accurate, real-time data and easy-to-use dashboards. 

With the right insights, you’ll be able to make better informed, proactive decisions about your business’s liquidity and financial planning. 

Automating the tracking and forecasting process also reduces the risks of human error and helps keep your books in tip-top shape. 

This is especially helpful as your business grows, freeing you to focus on other strategic priorities while ensuring your finances are well-managed.

Final thoughts

Understanding the difference between accrued expenses and accounts payable is important for managing your business’s finances effectively. 

While both represent liabilities your company owes, they differ in terms of timing, recognition, and cash flow impact. 

Accounts payable typically involves short-term obligations due within a specific period. 

Accrued expenses, on the other hand, are ongoing costs accumulated over time and need to be recognized within each accounting period. 

You’ll want to make sure you’re tracking all your liabilities precisely for a smooth cash flow and to avoid financial surprises. 

Using automated AP tools will help streamline this process, giving you better control over your company’s liquidity and financial planning.

Frequently asked questions about accrued expenses

How do accrued expenses affect cash flow?

Accrued expenses don’t immediately affect cash flow because no payment has been made yet. Instead, they affect your income statement and balance sheet by recognizing a cost before cash leaves the business. The cash flow impact occurs later, when the liability is settled.

What are some common mistakes or risks when recording accruals?

Some of the most common mistakes people make is forgetting to reverse an accrual when payment is received, accidentally accruing an expense that’s already been paid, and errors related to dating accrual expenses or the actual costs involved.

If you forget to reverse an accrual once the actual invoice or payment comes through, the same expense will be counted twice, overstating your costs for the period.

Accidentally accruing an expense for a payment that’s been paid can happen when communication between accounting and operations teams breaks down.

Because accruals are often based on estimates rather than final invoice amounts, there’s also a risk of recording a figure that’s meaningfully off from the actual cost. If the variance is large enough, this can distort your financial statements.

Timing errors, such as dating an accrual to the wrong period, undermines the whole purpose of matching expenses to when they were actually incurred.

As accrual accounting is more complex and requires more journal entries than cash accounting, it carries a higher risk of human error, particularly for businesses that aren’t using automated accounting software.

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