Difference Between Accounts Payable and Accrued Expense

Accounts Payable and Accrued Expenses are two of the most important accounts that are shown in the financial statements of a business organization. Both, Accounts Payable and Accrued Expense play a critical role in the accounting of the position of a business organization.

Accounts Payable vs Accrued Expense

The main difference between Accounts Payable and Accrued Expenses is that Accounts Payable is an amount that a company or an individual is obligated to pay off to creditors or suppliers and Accrued Expense is the amount that is incurred but not yet paid.

Accounts Payable and Accrued

Account payable can be referred to as an account that is represented in a ledger. It is an amount that a company or an individual is obligated to pay off to creditors or suppliers. Accounts Payable is a short-term debt that is required to be paid. Account payable is a liability and is shown under the head of ‘current liabilities’ in the balance sheet of the firm. 

Accrued Expense is also known as Accrued Liabilities is a term of accounting that refers to the amount which the company has already paid before it has been recorded in the financial statements of the company.

Comparison Table Between Accounts Payable and Accrued Expense

Parameters of Comparison Accounts PayableAccrued Expenses
The Receiver of the Payment The payment made by the business organization is received by any creditor, vendor, supplier, or contractor who lends goods or services to the business organization on credit. The payment made by the business organization is received by landlords, employees, etc.
Payment Timeline The amount of Accounts Payable is outstanding within 12 months. In Accrued Expense, the payment which is needed to make is outstanding at the end of the accounting period of the firm.
Treatment in the Balance sheet This amount is shown in the balance sheet of the company under the head of ‘current liabilities’. This amount is shown in the balance sheet of the company under the head of ‘current liabilities’.
Examples Raw materials, stock, furniture, machinery, purchased on credit.Rent, wages, salaries, interest on banks loans, etc.

What is Accounts Payable? 

Account payable is a short-term liability as to the company or an individual has to pay off the debt of goods or services that they have purchased on credit from the creditors or suppliers. Accounts Payable are not only limited to business companies but are applied to individuals as well. A department that manages the invoices or bills for the goods and services and maintains the record for short-term debts is also referred to as Accounts Payable.

The major responsibility of the Accounts Payable department is to go through the transactions that take place between the vendors and the company and ensure that all outstanding payments are approved, processed, and paid by the vendors. Recording crucial data and noting it down in the company’s financial statements or the system of book-keeping means processing an invoice. After the processing of an invoice, the invoice goes through major processes of business to pay off the short-term debt.

The increment or reduction in the amounts of account payable is shown in the cash-flow statement of the company. The management strives to pay this amount as close as to its due date to enhance its cash flow position. Accounts Payable plays a crucial role in maintaining the company’s good cash flow position. The increment in Accounts Payable shows that the company has purchased more goods or services on credit rather than paying off. 

What is Accrued Expense? 

Accrued Expense shows that the company owes some amount that the company needs to pay in the future. Numerous entries of the journal are required to be passed in accrual-based accounting. It is possible that the amount of Accrued Expense is estimated, however, the amount can be modified according to the received invoice or bill. A company records numerous Accrued Expenses in its financial statements.

Typically, there are two types of Accrued Expenses- Recurring & routine and infrequent & non-routine. The recurring & routine Accrued Expenses include the expense which occurs on a daily basis in the cycle of business. Whereas non-routine & infrequent are the Accrued Expenses that do not occur on a daily basis in the cycle of business. Prepaid Expenses are the opposite of Accrued Expenses.

Main Differences Between Accounts Payable and Accrued Expense

  1. Accounts Payable are related to the everyday living expenses of a business company while Accrued Expenses are periodic. 
  2. Accounts Payable only occur when a company makes a purchase of any goods and services on credit while Accrued Expense exists in every form of business. 
  3. The invoices or bills of Accounts Payable are received by the business organizations whereas the invoice or bills of Accrued Expenses are not with the business organization for a short period. 
  4. Accounts Payable are recorded in the balance sheet of the firm when a business organization purchases goods or services on credit. While the entries of Accrued Expenses are recorded in the balance sheet of the firm at the end of the accounting year of the firm. 
  5. Accounts payable are majorly related to vendors, creditors, etc. whereas Accrued Expenses are majorly related to employees, banks, etc.

Conclusion

Many people confuse the amounts of Accounts Payable and Accrued Expenses, however, they share a broad difference. An increase or decrease in Accounts Payable amount or Accrued Payable drastically affects the cash flow position of the business organization. Business organizations strive to balance these two accounts in their financial statements.

References

  1. https://books.google.com/books?hl=en&lr=&id=fR1BZf6iw-4C&oi=fnd&pg=PR7&dq=accounts+payable&ots=FpixXTmyw5&sig=gAgz7cbE5Kye-xbxuY32ygMM_fw
  2. https://link.springer.com/content/pdf/10.1007/978-3-662-41544-3_1.pdf
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