Accrued expenses vs accounts payable: Key differences

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 dive into each term, their key differences, and why this matters 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.

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 1^st 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 AP 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 suppler’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 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 accouting 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.

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.