Accrued Expenses vs Accounts Payable: What They Are & How They’re Different

Two terms in the dictionary of payables often confuse: accrued expenses and accounts payable. Both refer to money a company owes but are recorded differently and at different times. Understanding these terms’ differences ensures accurate financial reports, improves cash flow management, and supports better decision-making.

This guide will cover:

• The core differences between accrued expenses and accounts payable
• How and when they are recorded in financial statements
• Real-world examples to clarify these concepts
• Their impact on business finances and decision-making

By the end of this guide, you will have a clear understanding of accounts payable versus accrued expenses and their role in financial management. Let’s get into it.

What Are Accrued Expenses?

Accrued expenses are company liabilities for costs incurred but not yet invoiced or paid, essential for accurate accrual accounting. For example, if employees work in December, salaries earned during this period are recorded as an accrued expense in December, even if paid in January, ensuring December’s financial reports accurately reflect labor costs. Similarly, estimated utility usage in December, even with bills arriving in January, is also recorded as an accrued expense. 

What Is Accounts Payable?

Accounts Payable (AP) represents a company’s short-term financial obligations to its vendors or suppliers for goods and services already received, crucially distinguished from accrued expenses by the presence of a vendor-issued invoice. For instance, upon receiving office supplies accompanied by a vendor invoice, a company immediately records this invoiced amount as an Accounts Payable liability, reflecting a confirmed debt. 

Key Differences Between Accrued Expenses & Accounts Payable

While both accrued expenses and accounts payable fall under current liabilities, their fundamental difference lies in timing and recognition.

Accrued Expenses vs Accounts Payable: Examples

Imagine your company uses cloud computing services from a vendor company. Your agreement is that you pay for your cloud service usage after you’ve used it, typically at the beginning of the next month for the previous month’s usage. The billing cycle is monthly, from the 1st to the end of each month.

Let’s focus on the end of March 2025 to see how both accounts payable and accrued expenses are treated:

Accrued Expense Example (March 31st, 2025)

Throughout March, your company has been actively using the vendor company’s cloud services – things like servers, data storage, and software. By March 31st, the month ends, and your company has consumed a full month of these cloud services. Even though the vendor company hasn’t sent an invoice yet for March’s usage (they usually send it in early April), your company knows it owes the vendor company for the cloud services used in March.

Therefore, on March 31st, your company’s accounting team will calculate an Accrued Expense for the estimated cost of cloud service usage in March. This is an estimate because the exact invoice hasn’t arrived, but based on past usage or a contract, they can make a good guess. This is important to record the expense in March, the month the services were used, which is good accounting practice.

Accounts Payable Example (April 5th, 2025)

On April 5th, 2025, the vendor company sends your company an invoice for ₹50,000 for the cloud services used during March. When your company receives this invoice, they will now record an Accounts Payable of ₹50,000. The accrued expense previously recorded for March will be adjusted or removed because the exact amount is now known from the invoice. Accounts Payable is created because your company has received a formal invoice from the vendor company for services already provided, and it’s now a short-term debt with payment terms on the invoice.

Think of accrued expenses as recognizing you owe money before the official bill comes, and Accounts Payable as what you record after you get the official bill. Accrued expenses are estimations, while Accounts Payable are based on concrete invoices.

Accrued Expenses vs Accounts Payable as a Liability

Accrued expenses and accounts payable are recorded as liabilities on a company’s balance sheet, but they differ in terms of timing, recognition, and financial impact. Understanding these differences is crucial for accurate financial reporting and effective cash flow management.

Impact of Accrued Expenses & Accounts Payable on Balance Sheet

Accrued expenses and accounts payable are both classified as current liabilities since they must be settled within a short period. However, their impact on financial statements varies based on how they are recognized and recorded.

Conclusion

Understanding the differences between accrued expenses and accounts payable is essential for businesses to maintain accurate financial records, manage cash flow efficiently, and comply with accounting standards.

Both accrued expenses and accounts payable are classified as current liabilities, but their key distinction lies in timing and recognition:

• Accrued expenses are estimated obligations for expenses incurred but not yet invoiced or paid.
• Accounts payable represents confirmed liabilities for which an invoice has already been received.

By effectively tracking these liabilities, businesses can::

• Ensure accurate financial reporting under GAAP and IFRS.
• Improve cash flow management and plan for future expenses.
• Avoid financial misstatements that could impact profitability.
• Strengthen vendor and employee relationships by ensuring timely payments.

FAQs on Accrued Expenses vs Accounts Payable

1. What is the main difference between accrued expenses and accounts payable?

The key difference is in timing and recognition:

• Accrued expenses are recorded before an invoice is received, based on an estimated obligation (e.g., unpaid salaries, utilities).
• Accounts payable is recorded after an invoice is received, representing an official obligation to a vendor or supplier.

2. Are accrued expenses and accounts payable considered liabilities or assets?

Both accrued expenses and accounts payable are classified as current liabilities on the balance sheet because they represent obligations the company must pay within a short period.

3. What is an example of accrued expenses vs accounts payable?

• Accrued Expenses Example: A company’s employees work in December, but salaries are paid in January. The company records the salaries as an accrued expense in December.
• Accounts Payable Example: A company orders office supplies and receives an invoice due in 30 days. The invoice amount is recorded as accounts payable.

4. Is accrued expense a liability?

Yes, accrued expenses are liabilities because they represent a company’s obligation to pay for expenses incurred. They are classified under current liabilities on the balance sheet.

5. Why is accounts payable not recorded as an expense?

Accounts payable is not an expense because it represents an outstanding payment for a past purchase. Expenses are recorded when they are incurred, while accounts payable tracks the obligation to pay vendors for goods and services already received.

6. How do accrued expenses and accounts payable impact cash flow?

• Accrued expenses do not impact cash flow immediately since no payment has been made. However, once paid, they reduce cash flow.
• Accounts payable increase cash flow temporarily because payments are deferred, but cash flow decreases when the company settles the invoice.

7. Can a business have both accrued expenses and accounts payable?

Yes, most businesses will have both:

• Accrued expenses for items like employee salaries, interest, or utilities that have been incurred but not yet invoiced.
• Accounts payable for invoices from vendors and suppliers that need to be settled.

8. What happens if accrued expenses or accounts payable are not recorded properly?

Failing to record accrued expenses can result in understated liabilities and overstated profits, making financial statements inaccurate.
Failing to record accounts payable can lead to missed payments, late fees, and damaged vendor relationships.