Accrued Expense vs. Accounts Payable are two critical accounting concepts that determine how and when a business records what it owes. Although both represent money the company needs to pay, they occur at different points in the financial cycle. Understanding this difference helps ensure accurate bookkeeping, realistic profit reporting, and better financial decisions.
In simple terms, an accrued expense is a cost your business has already incurred but hasn’t yet received a bill for. Meanwhile, accounts payable are bills you’ve already received but haven’t paid. This timing difference might seem small, but it plays a big role in showing the true financial health of your business.
Let’s break it down clearly.
What Is an Accrued Expense?
An accrued expense refers to costs that have been used or earned but not yet billed or paid. It’s money you owe for goods or services already received, even if no invoice has arrived. Think of it as a silent or “invisible debt” waiting to be recognized.
Example:
Imagine your employees work throughout December, but payday is on January 5. By the end of December, your company already owes them for their work. Even though no cash has left your account, the cost exists. Recording this as an accrued expense ensures that December’s profit isn’t overstated.
Other common examples include:
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Electricity used in December but billed in January.
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Loan interest that accumulates monthly but is paid later.
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Taxes owed for the current year but paid months after.
Accrued expenses help reflect the true financial position of your company by matching expenses to the period in which they occur, not when they are paid.
What Are Accounts Payable?
Accounts Payable (AP), on the other hand, refers to amounts you owe after receiving an invoice or bill. This is the visible, clearly documented debt already on your books.
Example:
If you buy office supplies on credit and receive a ₦30,000 invoice due in 30 days, that amount becomes accounts payable once recorded. You already have the bill, so it’s now officially recognized as a liability until payment is made.
Other examples include:
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Vendor invoices for goods or materials.
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Contractor or consulting fees.
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Subscription or software renewal invoices.
Accounts payable ensures you don’t forget upcoming payments and helps track short-term obligations owed to suppliers and service providers.
Accrued Expense vs. Accounts Payable: The Key Difference
The main distinction lies in timing and documentation:
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Accrued Expense: The cost has been incurred, but no invoice has been received.
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Accounts Payable: The invoice has been received and recorded, but payment hasn’t been made.
Both appear as liabilities on the balance sheet, but accrued expenses are estimated obligations, while accounts payable are confirmed debts.
This distinction matters because it determines which period your expenses fall into, ensuring accuracy in profit and loss reporting.
Why the Difference Matters
Understanding Accrued Expense vs. Accounts Payable is vital for:
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Accurate Financial Reporting: Recording expenses in the right period prevents overstated profits.
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Cash Flow Management: Knowing what you owe—billed or unbilled—helps plan payments better.
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Audit Readiness: Clear records of both accrued expenses and accounts payable make your books transparent and compliant.
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Investor Confidence: Proper expense tracking shows professionalism and financial discipline, building trust with investors and lenders.
Examples in Action
Example 1: Salary Accrual
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Staff earn ₦150,000 in December; payday is January 15.
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On December 31, record:
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Debit Salary Expense ₦150,000
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Credit Accrued Salaries ₦150,000
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On January 15, when payment is made, reduce the accrued salaries and bank balance.
This ensures December’s expenses reflect actual work done.
Example 2: Electricity Bill Transition
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Electricity used in December costs ₦45,000. Bill arrives on January 10.
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December 31 entry:
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Debit Utilities Expense ₦45,000
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Credit Accrued Utilities ₦45,000
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When the invoice arrives, reverse the accrued entry and record it as Accounts Payable.
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When payment is made, reduce AP and bank balance.
Here, an accrued expense becomes accounts payable once the bill arrives.
Example 3: Vendor Invoice (Pure Accounts Payable)
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December 20: Supplier delivers goods worth ₦30,000 and sends an invoice.
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Entry:
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Debit Supplies Expense ₦30,000
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Credit Accounts Payable ₦30,000
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When paid in January:
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Debit Accounts Payable ₦30,000
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Credit Bank ₦30,000
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This is strictly accounts payable since the invoice was received immediately.
Getting It Right in Your Books
In summary, Accrued Expense vs. Accounts Payable might seem like technical accounting terms, but they define how your business recognizes costs and obligations. Accrued expenses capture what you owe before an invoice arrives, while accounts payable track what you’ve been billed but not yet paid.
Mastering these concepts ensures your financial statements tell the real story — not an inflated one. For entrepreneurs, accountants, and finance managers, this understanding keeps your books clean, your reports credible, and your decisions smart.
At BFI Insights, we help professionals and businesses understand, record, and manage their financial obligations the right way. Our financial training and advisory services simplify complex accounting terms so you can make decisions with confidence.
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