When a company does business, it incurs various kinds of expenses. Accounts payable and accrued expenses are both money owed by a particular company to outside parties and hence, are categorized as liabilities.
However, the natures of both the expenses vary and, in this article, we will explain how both the expenses differentiate from each other.
When a company purchases goods or services and decides to pay the vendor in the near future, the said supplier is referred to as a creditor or accounts payable of the company.
Total accounts payable is a balance on a general ledger that is an accumulation of all such purchases of goods made by the company on credit.
Accounting and Reporting of Accounts Payable:
Accounts payable are an obligation payable by the company to its suppliers and hence have a credit nature.
The journal entry to record a credit purchase transaction is followed by a debit to the inventory account by the number of goods purchased against a credit of the same amount to the accounts payable account.
Cr_Accounts Payable xx
Accounts payable are short-term debts and hence, are reported under the current liabilities section on the balance sheet of the company.
Purchase of raw material, or finished goods, or work-in-progress on credit would all increase the accounts payable balance as the money is owed to the supplier even though the purchase has been made.
The accrual concept of accounting requires you to report expenses during the period they were incurred regardless of the cash being paid in the current accounting period or another.
The accumulation of your unpaid bills over a period of time is known as accrued expenses. These are expenses that are recognized in the books of the account even though they’re not paid for.
Accounting and Reporting of Accrued Expenses:
Accruals are bills owed to other entities, implying a future outflow of cash to satisfy the obligations.
Hence, accrued expenses have a credit nature. The journal entry to recognize accrued expenses is followed by a debit to the expense account and credit to the accrued expense account.
The debit entry increases your expense and the credit entry increases your liability.
Dr_Expense Account xx
Cr_Accrued Expense Account xx
Accrued expenses are short-term liabilities and hence, are reported under the current liabilities section of the balance sheet.
Accrued expenses include wages and salaries payable, interest payable, rent payable, utility expenses payable, and any other expense that has been incurred but not yet paid for.
- An account payable is recorded at the receipt of an invoice whereas no invoice is received for accrued expenses.
- Accrued expenses are periodic and incurred on a monthly basis whereas accounts payable are part of the daily operations.
- Accounts payable are money owed to the supplier only whereas accrued expenses are money owed to employees or banks.
- Accounts payable are only recorded when credit purchases are made whereas accrued expenses are recorded every now and then by all the companies.