Accounts Payable and Accrued Expenses: A Beginner’s Guide

Both represent money you owe. The difference is whether an invoice exists yet, and it changes how each is recorded, reviewed, and cleared.

The distinction

• Accounts payable: the goods or services were received and an invoice has arrived. The amount is known and documented
• Accrued expenses: the goods or services were received and no invoice has arrived. The amount is estimated

Both belong in the period the cost was incurred, not the period it is paid. That is the whole purpose of accrual accounting, and it is why a month can look expensive without any cash leaving.

Typical accruals in a small business

• Wages earned in the period but paid in the next
• Utilities consumed but not yet billed
• Interest accrued on a loan since the last payment
• Professional fees for work performed and not yet invoiced
• Subcontractor work completed where the invoice is outstanding

How accruals are handled at close

The usual method is to record the accrual at period end and reverse it at the start of the next period. When the actual invoice arrives it is entered normally as accounts payable, and the reversal prevents the cost being recorded twice.

Businesses that record accruals without reversing them end up double-counting, which is one of the more common causes of a balance sheet that will not reconcile.

Why mixing them causes problems

Accounts payable is a list of specific invoices from specific suppliers with specific due dates. It should reconcile to supplier statements and it drives your payment scheduling.

Accruals are estimates with no invoice behind them. Put them in accounts payable and the aging report contains items that cannot be paid, cannot be matched to a statement, and will never clear normally. The report stops being usable for its actual purpose.

A practical rule

If you could hand it to someone and say “pay this,” it is accounts payable. If you are estimating what will eventually be invoiced, it is an accrual.

Compare the entries

When a valid supplier invoice is entered, the business usually debits an expense or asset and credits accounts payable. The vendor, invoice number, due date, and amount appear in the payable detail. Payment later debits accounts payable and credits cash.

For an accrued expense without an invoice, the business debits the appropriate expense and credits an accrued-liability account. The entry should include the estimate, period, basis, owner, and expected invoice timing. It should not create a payable to a fabricated vendor.

Estimate an accrual

Use the best evidence available: hours worked, units received, contract rates, service periods, prior bills adjusted for current activity, or confirmation from the operating owner. Avoid simply repeating last month’s amount when the underlying service changed.

Set a review threshold appropriate to the business and reporting purpose. Small estimates may be grouped, while material or unusual accruals deserve specific support. Apply the policy consistently so one month is not made to look better by omitting expected costs.

Reverse and replace without double counting

Many recurring accruals reverse at the beginning of the next period. The actual invoice is then recorded through accounts payable in the normal workflow. Compare the invoice with the estimate and explain the variance.

Some accruals may be maintained and adjusted rather than automatically reversed, depending on the accounting process. Whatever method is used, keep a roll-forward showing opening balance, additions, reversals, invoices, payments, and ending balance.

Cutoff at month-end

Review invoices received after close for goods or services delivered before the reporting date. Ask department or project owners about completed work not yet billed. Check receiving records, contracts, payroll dates, utilities, interest, professional fees, freight, and recurring services.

Cutoff should follow when the economic activity occurred under the selected reporting policy, not when a manager wants the expense to appear. Document uncertain items and update the estimate when better information arrives.

Reconcile the two liability groups

Reconcile accounts payable to the vendor subledger and investigate differences with statements, invoices, credits, and payments. Reconcile accrued expenses to a schedule by type, period, estimate, expected invoice, and reversal status.

Old accruals require investigation. They may represent an invoice posted elsewhere, a service never received, an estimate that should be released, or a genuine obligation still awaiting billing. Do not clear them solely because they are old.

Common errors

• Recording an uninvoiced estimate under a fake vendor
• Leaving an accrual after the invoice is entered
• Reversing in the wrong period
• Coding the invoice and accrual to different accounts
• Omitting services received near period-end
• Accruing cash payments rather than expenses
• Letting the payable aging contain unpayable estimates
• Clearing a liability without support

Close checklist

• Reconcile the payable detail with the control account
• Review post-close invoices and receiving activity
• Obtain estimates from responsible operating owners
• Record the basis and period for each accrual
• Approve unusual or material entries
• Schedule reversals or roll-forwards
• Compare actual invoices with prior estimates
• Investigate old and negative balances

Illustrative month-end example

Assume a consultant completed work before month-end but has not billed the business. Based on approved hours and the contract rate, the business estimates an illustrative $6,000 expense. It records the expense and an accrued liability with the supporting calculation.

At the start of the next period, the entry reverses under the company’s process. The supplier later invoices $6,400, which is entered into accounts payable. The $400 difference is reviewed to determine whether hours, scope, timing, or the estimate caused it. The workflow records the cost once and leaves a payable that can be approved and paid.

Goods received but not invoiced

Purchasing and receiving data can identify inventory, equipment, or supplies received before the supplier invoice. Compare open purchase orders and receipts with bills entered after close. Accrue the supported amount when required by the reporting policy.

When the invoice arrives, match quantity, price, freight, tax, and other terms. Clear the receipt or accrual through the designed system process. Manual entries that bypass purchasing detail can leave open quantities or duplicate liabilities.

Improve estimate quality

Track actual invoices against prior estimates by accrual type and owner. Repeated overestimates or underestimates may point to weak operational data, inconsistent cutoff, or a changed contract. Adjust the estimation method rather than posting the same variance every month.

Require direct evidence for large items and use a documented method for routine items. Review whether an accrual is still needed, not only whether it was created. The schedule should make every ending balance understandable to someone who did not prepare it.

Use separate account names that make the distinction visible on the balance sheet. Clear descriptions help payment staff avoid treating an estimate as an invoice and help reviewers trace each accrual to its supporting schedule.

Tie the accrued-expense schedule to the trial balance after every adjustment. A difference between the schedule and ledger is an unresolved close item, not a rounding convention.