In accounting or book-keeping, there are two terms you will commonly come across- these are accrued expenses and accounts payable.
Some people have a hard time distinguishing accrued expenses vs accounts payable. As a result, mistakes are made while recording. Here we’ll try to explain the differences between them.
What Are Accrued Expenses?
During a business’s lifespan, they incur many expenses like rent and salaries to employees. These expenses are usually periodic and accounted for every month.
Due to the accrual basis, these expenses have to be reported in the month they occur, regardless of whether they have been paid or not. These types of expenses are known as accrued expenses.
Accrued expenses are recorded in journals by debiting the expense account and crediting the accrued expense account. Since your expenses increase, the expenses account is increased. Your liabilities increase since you have yet to pay those expenses. That is why the accrued expenses account is credited.
What Is Accounts Payable?
Sometimes when a business purchases resources, they might buy them using credit instead. As a result, the business is liable to their supplies for this and must pay this off at a later date. Since the supplier is owed money, they are termed as a creditor or accounts payable for that business or company.
The total amount of accounts payable represents all the money owed to the suppliers for the purchases they made over a certain period.
By nature, accounts payable is a credit item. In journals, it is recorded by debiting the purchase made and then crediting the accounts payable account. This record denotes that a purchase has been made and that the company still owes money.
When the payment has been completed, the accounts payable account is debited and the cash account is credited since cash is used for the payment.
Accrued Expenses Vs Accounts Payable: An Overview
Accrued expenses refer to bills or expenses that a company has recorded or taken note of but has not yet paid. For example, rent for a building or floor is commonly incurred during a business and thus is listed as for rent payable in accounting books.
On the other hand, accounts payable refers to the short-term debts that a company has to pay off to their supplies. For example, a company can buy raw material from a supplier but pay the money at a later date.
Accounts payables are not always recorded and only done when something is bought using credit. In contrast, accrued expenses like rent are always recorded while the business is operating.
Some Articles You’ll Find Interesting:
Accrued expenses arise due to the accrual basis denoting that expenses must be recorded for the month even if they have not been paid. Meanwhile, accounts payable arises due to credit purchases made by the company.
- Accrued expenses are paid to either employees or the bank. Accounts payable are paid to the suppliers.
- Usually, accrued expenses are recorded periodically, whereas accounts payable aren’t recorded periodically.
- Invoices are prepared for accounts payable, whereas invoices are not made for accrued expenses. Adjustments are made at the end during payment for these expenses.
Differences Between Accrued Expenses and Accounts Payable: A Table
|Parameters of Comparison||Accrued Expenses||Accounts Payable|
|Invoice||No invoice is used to record accrued expenses.||Invoices are issued and used for accounts payable.|
|Duration||Accrued expenses are recorded periodically, usually monthly.||Accounts payable are not recorded periodically but only recorded when a credit purchase is made.|
|Paid to||These expenses are paid to banks or employees.||These are paid to suppliers.|
|Amount Represented||Accrued expenses usually represent an estimated amount of what’s owed, and adjustments are made later on.||They represent the exact amount that is owed to suppliers.|
We hope that our article has demonstrated the differences and explained accrued expenses vs accounts payable properly. These two terms are very important in accounting, and failure to recognize them can cause serious errors in accounting records.