Key Difference – Accrued Expense vs Accounts Payable
Accrued expense and accounts payable are two important item recorded in the balance sheet of companies. The key difference between accrued expense and accounts payable is that while an accrued expense is an expense recognized in the accounting books for the period it is incurred whether it is paid in cash or not, accounts payable is the payments to creditors who have sold goods to the company on credit.
CONTENTS
1. Overview and Key Difference
2. What is Accrued Expense
3. What is Accounts Payable
4. Side by Side Comparison – Accrued Expense vs Accounts Payable
5. Summary
What is an Accrued Expense?
An accrued expense is an accounting expense recognized in the books before it is paid for. These expenses are typically periodic in nature and will be recorded as a current liability in the balance sheet. Accrued expenses should be recorded in order to comply with the accruals concept of accounting. According to the accruals concept, revenues and expenses should be recorded in the period in which they occur, irrespective of whether cash is paid or not.
An accrued expense should be recorded when the company can reasonable expect their payment. Common instances for such accrued expenses are rent, wages and interest on bank loan, i.e., instances where similar payments are made each month.
How to Record Accrued Expenses?
Take the following example to see how to record accrued expenses.
E.g. ABC Ltd has taken out a bank loan of $10,000 on 10% interest and each monthly interest payment is due on the 15th of following month. Thus, the interest payment of $1,000 will be recorded as,
Interest payments A/C DR$1,000
Accrued Expenses A/C CR$1,000
The below entry will be recorded once the payment is made,
Accrued Expenses A/C DR$1,000
Cash A/C CR$1,000
What is Accounts Payable?
This indicates the obligation of the company to pay off short term creditors; i.e. creditors to which the company owes funds within one year period of time. This situation arises when the company has purchased goods on credit. Accounts payable is included as a current liability in the balance sheet.
How to Record Accounts Payable?
Look at the following example.
E.g. ABC Company purchased goods worth of $1,150 from XYZ Company.
Thus, the Accounts payable will be recorded as,
XYZ Company A/C DR$1,150
Accounts payable A/C CR$1,150
When the payment is made,
Accounts payable A/C DR$1,150
Cash A/C CR$1,150
Two important ratios are calculated using Accounts payable.
1. Accounts Payable Turnover Ratio
Accounts Payable Turnover Ratio = Cost of Goods Sold / Average Accounts Payable
The above ratio shows how many times a year the accounts payables are settled by the company. An average (Opening payables and closing payables divided by 2) is considered here in order to present an accurate ratio by averaging out the payables for the year. If the turnover ratio is falling from one period to another, this is a sign that the company is taking longer to pay off its suppliers than it was in previous time periods. The opposite is true when the turnover ratio is increasing, which means that the company is paying off suppliers at a faster rate.
2. Accounts Payable Days
Accounts Payable Days = (Account Payable/Cost of goods sold)*365
Accounts payable days indicate how many days the company takes to pay off the creditors. Longer credit periods are generally not liked by many creditors since they prefer to collect amounts due sooner. In some agreements, the time period where the payments should be made may be specified in advance.
Invoice is a main document with regard to accounts payable. This is the document sent to a buyer that specifies the amount and cost of goods that have been provided by a seller. Thus, when an invoice is sent to the company by a creditor, it should be carefully checked for accuracy in terms of the amount of goods and their prices.
Figure 1: An invoice issued on credit sales
What is the difference between Accrued Expense and Accounts Payable?
Accrued Expense vs Accounts Payable |
|
| Accrued Expense is recorded for the accounting period it belongs to, irrespective of cash payment. | Accounts Payable indicates the obligation to settle short-term creditors. |
| Occurrence | |
| Accrued Expenses are generally incurred by all companies. | Accounts Payable only arises if purchases are made on credit. |
| Type of Payments | |
| Accrued Expenses are incurred for monthly payments.
Eg: rent, wages, etc. |
Account Payables only record payments due to creditors. |
Summary – Accrued Expense vs Accounts Payable
The main difference between accrued expense and accounts payable relates to the parties they are being paid for. Accrued expenses may be payable to various parties such as employees and banks while accounts payable is due to parties from whom the company has purchased on credit. Accounts payable should be managed and maintained at an acceptable level in order to continue healthy business relationships with corporate partners.
Reference:
1. “Accounts Payable – AP.” Investopedia. N.p., 15 Aug. 2016. Web. 20 Feb. 2017.
2. “Accrued Expense.” Investopedia. N.p., 17 Nov. 2003. Web. 21 Feb. 2017.
3. “Invoice – What is an invoice?” Debitoor Accounting Glossary. N.p., n.d. Web. 21 Feb. 2017.
4. “Days Payable Outstanding – The Strategic CFO.” ICal. N.p., 18 Oct. 2016. Web. 21 Feb. 2017.
Image Courtesy:
1. “Invoice, Public Resource’s big box of standards, the office, Hackney, London, UK.jpg” by Cory Doctorow (CC BY-SA 2.0) via Flickr