Accounts payable vs. accrued expenses: Key differences

The core difference between accounts payable and accrued expenses is documentation. You record accounts payable after you receive an invoice, and you record accrued expenses before one arrives. Both sit as current liabilities on the balance sheet under accrual accounting. Getting the distinction right matters for accurate financial statements and reliable cash flow forecasting.

What are accrued expenses?

Accrued expenses, also called accrued liabilities, are costs you've incurred before an invoice arrives. You record them through an adjusting journal entry at the end of an accounting period so the expense hits the period it actually occurred in, following the matching principle.

Because there's no invoice to confirm the exact figure, you estimate the amount. Once the invoice arrives, you adjust the entry to reflect the actual cost.

Accrued expenses appear as current liabilities on the balance sheet. They're typically settled within one year, making them part of your short-term obligations alongside accounts payable.

Common accrued expense examples

• Employee wages: Staff works during the pay period, but payday falls in the next period
• Utilities: You've consumed electricity, water, or gas, but the bill hasn't arrived
• Accrued interest: Interest accumulates on a loan between payment dates
• Rent: You've occupied space for the month but haven't been billed yet

What is accounts payable?

Accounts payable (AP) are amounts you owe to vendors or suppliers after receiving an invoice. You know the exact amount and due date, which distinguishes AP from accrued expenses.

You record AP when the invoice arrives, creating a debit to the relevant expense or asset account and a credit to accounts payable. Payment terms are typically Net 30, Net 60, or Net 90, giving you a defined window to settle the balance.

Common accounts payable examples

• Inventory purchases: Raw materials or supplies ordered from a vendor with an invoice
• Professional services: Legal, consulting, or audit fees with an invoice and payment terms
• Contractor payments: A freelancer or contractor submits an invoice after completing work
• Office supplies: A vendor delivers supplies with an invoice due in 30 days

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.

The differences extend beyond timing to documentation, ledger mechanics, and cash flow impact:

Don't confuse accrued expenses with prepaid expenses. Prepaid expenses are the opposite: you've paid for something you haven't consumed yet, like paying insurance premiums upfront. Accrued expenses are costs you've consumed but haven't paid for.

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

You can post nearly any business expense to accrued expenses or accounts payable; it depends on when your vendor sends the invoice. However, some expenses are commonly accrued, and others are typically pushed straight to accounts payable.

Accrued expenses

Common examples of accrued expenses include:

• 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
• Rent: You've occupied space for the month but haven't been billed
• Estimated taxes: Taxes owed for the period that haven't been formally assessed

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

How to record accrued expenses and accounts payable

Both accrued expenses and accounts payable require journal entries, but the mechanics differ depending on whether you have an invoice in hand.

Accrued expense journal entry

When you accrue an expense, you debit the expense account and credit accrued expenses (or accrued liabilities). This adjusting entry at period end ensures the cost hits the correct accounting period.

For example, if you estimate $2,000 in employee wages earned but not yet paid at month end, you'd debit Wages Expense for $2,000 and credit Accrued Expenses for $2,000.

Accounts payable journal entry

When you receive an invoice, you debit the expense or asset account and credit accounts payable for the invoiced amount.

When you pay the AP balance, you debit accounts payable and credit cash, completing the cycle.

How accrued expenses and accounts payable work together

Sometimes the same expense touches both accounts over its lifecycle.

Let's say 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:

Accrued expense example

The entries above show how you'd accrue $100 each month for the HVAC service contract. By year end, you've accrued $1,200 in total, matching the expense to the periods you actually used the service.

When an accrued expense becomes accounts payable

When the invoice finally arrives, you move the balance from accrued expenses to AP.

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:

How accrued expenses and accounts payable impact cash flow

When you book an expense to accrued expenses, there's no immediate cash outlay. The same is true when you book to AP. Both entries indicate a future impact on cash flow.

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.

Accrued expense cash flow 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 cash flow 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 tracking both matters for your close

Classifying expenses correctly between AP and accrued accounts keeps your balance sheet accurate and your close process clean.

Cash keeps your business running. Without enough of it, even a profitable operation can stall. 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 don't have a set due date, but they can 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): Both AP and accrued expense changes show up in the operating activities section of your cash flow statement
• Free cash flow (FCF): FCF starts with operating cash flow, so unpaid obligations in AP and accrued expenses directly affect the calculation
• Net working capital (NWC): Current liabilities, including AP and accrued expenses, are subtracted from current assets to calculate NWC
• Other liquidity ratios: The current ratio and quick ratio both use total current liabilities in the denominator, so your AP and accrued expense balances directly influence these measures

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