Accounts payable vs. accrued expenses: A quick guide

Accrued expenses and accounts payable play an essential role in financial reporting. They both track what you owe to third parties, and you’d list them both as current liabilities on your company’s balance sheet. Still, the terms aren’t interchangeable. Let’s learn the key differences between the two and how and when to use them.

At a glance: Accounts payable vs. accrued expenses

Accrued expenses and accounts payable are both short-term liability accounts that track your company’s financial obligations, but there’s one major difference: You record an accrued expense before you receive an invoice, and you post to accounts payable after you receive an invoice.

Here are a few other points of comparison:

Timing

When do you post an entry to your accrued expense account, and when do you post an accounts payable journal entry?

• Accrued expenses: If your business uses accrual accounting, you record an accrued expense when you’ve accepted goods or services but haven’t received a formal invoice
• Accounts payable: You post to accounts payable upon receiving an invoice or when you otherwise have an obligation to pay, representing a current liability

Amount owed

How much will your journal entry be for?

• Accrued expenses: Record the amount you will be billed for the goods or services you purchased. If you don’t know the exact number, you can estimate.
• Accounts payable: Post the amount shown on the invoice to accounts payable, i.e., the total cost of the goods or services that remains unpaid

Cash flow impact

Posting entries to accrued expense and AP don’t immediately impact cash flow. Rather, they signify an eventual impact.

• Accrued expenses: When you accrue an expense, you don’t imminently owe any cash, but you know that you’ll eventually receive an invoice that requires a cash payment
• Accounts payable: When you post to accounts payable, you signal that a cash payment will soon be required

Examples

Nearly any business expense can be posted to accrued expenses or accounts payable; it all depends on when the invoice is sent. However, some expenses are commonly accrued, and others are typically pushed straight to accounts payable.

Accrued expenses

Common examples of accrued expenses are:

• Employee wages: Your employees have performed their job duties, but you haven’t paid them yet
• Utilities: You’ve used heat and water but haven’t received any utility bills yet
• Accrued interest: You’ve incurred interest on a loan but haven’t been billed for the interest payments yet

Accounts payable

Common examples of accounts payable include:

• Purchases on credit: You’ve purchased raw materials, inventory, supplies, assets, etc. on credit, but the bill hasn’t come due
• Professional fees: Your lawyer reviews a contract for you and sends you an invoice, which you’re required to pay within 15 days
• Contractor fees: Your contractor performed services for you and sent you an invoice, which you’re required to pay within 30 days

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How accrued expenses and accounts payable work together

The main difference between accrued expenses and AP is when your payments are due. That means the same expense will sometimes hit both accounts. Let’s look at an in-depth example.

You have a contract with your HVAC provider that requires them to provide maintenance services throughout the year. The $1,200 contract is due once per year. Under the accrual method of accounting, you record 1/12 of the contract to accrued expense each month, showing that you’ve used 1/12 of that service contract.

These are the monthly adjusting entries you’ll record:

On January 5 of the following year, after completing the maintenance contract, you receive a bill from your provider. Now that you’ve received an invoice, you’ll want to move all the expenses you’ve accrued from your accrued expense account into your accounts payable account:

Then, you pay the total amount when the invoice is due on February 5:

When do accrued expenses vs. accounts payable impact cash flow?

When an expense gets booked to accrued expenses, there’s no immediate cash outlay. The same goes for when an expense gets booked to AP. But, as mentioned above, both entries indicate there will be a future impact on cash flow.

Generally, when comparing the two, an entry to AP shows that a cash outlay is just around the corner, while an entry to accrued expense indicates that a cash outlay is on the horizon. When it comes to accrued expenses, that payment could be due soon, or it could come due in months.

Because entries to accrued expense and AP don’t directly affect cash, you won’t see these entries on the cash flow statement. However, a reversing entry to these expense accounts does tend to hit your company’s cash flow statement. Let’s look at an example of each:

Accrued expense example

Each month, you accrue wastewater expenses. These periodic expenses come due only once per quarter. At the end of the quarter, you pay your bill. Only the payment (i.e., the reversing entry) would impact cash flow. This is what those entries might look like:

Accounts payable example

You receive an invoice from your supplier on June 1, and your payment terms are net 30. Only the payment (i.e., the reversing entry) would impact cash flow. This is what those entries might look like:

Why it’s important to understand cash flow impact

Cash is the lifeblood of a business. Without cash, even the most profitable businesses can’t survive. Fortunately, the amounts shown in your accrued expense and AP accounts can help you manage cash flow effectively.

AP shows a more immediate need for cash. If you don’t have enough cash to cover what’s in your AP account, you’re in trouble. Accrued expenses are a bit different because they don’t have a set due date. However, that doesn’t mean you can’t worry about that account balance; accrued expenses could turn into cash requirements at the drop of a hat.

It’s best practice to have enough cash to cover all current liabilities (which includes both accrued expenses and AP). To see if your cash reserves are adequate, look at some of the following financial ratios:

• Operating cash flow (OCF)
• Free cash flow (FCF)
• Net working capital (NWC)
• Other liquidity ratios

Streamline expense and AP management with Ramp

AP automation solutions help you manage short-term liabilities like accrued expenses and accounts payable. They help ensure invoices are recorded accurately, that they’re linked to the correct vendor or supplier, and that they’re traceable throughout the payment process.

Ramp’s modern finance platform gives you the tools to track expenses and plan for cash outlays. By combining powerful expense management features with AP automation and real-time financial reporting, Ramp gives you a holistic view of your company’s financial health.

‍Learn more about how Ramp’s accounts payable software helps customers save time and money.