Money Matters

Accrued expenses vs accounts payable: Key differences

Accrued expenses vs accounts payable are both business debts, but managed differently. Learn how each affects your financial reporting and cash flow.

Published May 22, 20268 min read Share

---

Key takeaways

• Accrued expenses and accounts payable are both liabilities, but they differ in timing and recognition. Your business records accrued expenses when it incurs costs and records accounts payable when it receives an invoice.
• Accrued expenses typically relate to ongoing costs such as wages, taxes, or interest, and must be recognised within the accounting period to ensure accurate financial reporting.
• Accounts payable represents short-term debts to suppliers with defined payment terms, allowing businesses to receive goods or services now and pay later.
• Both impact cash flow differently. Accounts payable affects short-term liquidity, while accrued expenses can build up over time and create larger future payment obligations if not tracked carefully.

---

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.

Accrued expenses can build up over time, and your business typically treats them as current liabilities because it needs to pay them within a year—often much sooner.

Your business usually links these expenses to ongoing costs it must track consistently, such as salaries, taxes, and interest on loans.

You may also include goods and services you’ve already received but the supplier hasn’t invoiced yet.

For example, your employees earn wages this month, but your business may not pay them until the 1st of the following month.

You should record these wages as accrued expenses in the current period.

Otherwise, your financial statement will miss the wages owed for the final 30 days of the year when you reach your year-end.

Record accrued expenses as liabilities in your books as soon as your business incurs them.

You need to track and account for these expenses in each accounting period to maintain an accurate view of your finances at any 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 supplier’s payment terms.

It functions similarly to supplier credit, where your business receives goods or services now and pays later according to agreed payment terms.

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

To compare accrued liabilities and accounts payable, focus on how your business recognises them, their timing, and their impact on 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

Accounts payable is recognised 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.

Your business hasn’t paid the expense yet, but must settle it within 30 to 90 days.

Accrued expenses

Record accrued expenses by the end of the accounting period, regardless of when the invoice arrives.

Account for costs such as wages, utilities, and interest as your business incurs them, even if you pay them later.

This approach ensures your financial statements accurately match costs with revenue 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 includes utilities, goods, or services your business has received but not yet been invoiced for, as well as interest accrued on loans before payment becomes due.

These types of costs accumulate during the accounting period, meaning you need to recognise 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

These costs typically build up over time, and your business must pay them at the end of the accounting period.

They can become difficult to manage if your business doesn’t monitor them closely.

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.

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.

Avoid getting caught off guard by large accrued expenses or scrambling to pay supplier 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.

Managing accrued expenses and accounts payable effectively

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 recognised 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 (FAQs)

Browse more topics from this article

• Accounting 101
• Bookkeeping
• business intelligence
• data analysis
• profit & loss
• trending topics