Accrual vs. Accounts Payable: An Overview
Both accrual and accounts payable are accounting entries that appear on a company’s financial statements. An accrual is an accounting adjustment for items (e.g., revenues, expenses) that have been earned or incurred, but not yet recorded. Accounts payable is a liability to a creditor that denotes when a company owes money for goods or services and is a type of accrual.
- Accrual and accounts payable refer to accounting entries in the books of a company or business.
- Accruals are earned revenues and incurred expenses that have yet to be received or paid.
- Accounts payable are short-term debts, representing goods or services a company has received but not yet paid for.
- Accounts payable are a type of accrued liability.
Under the accrual accounting method, an accrual occurs when a company’s good or service is delivered prior to receiving payment, or when a company receives a good or service prior to paying for it. For example, when a business sells something on predetermined credit terms, the funds from the sale are considered accrued revenue. The accruals must be added via adjusting journal entries so that the financial statements report these amounts.
Say a software company offers you a monthly subscription for one of their programs, billing you for the subscription at the end of every month. The revenue made from the software subscription is recognized on the company’s income statement as accrued revenue in the month the service was delivered—say, February.
At the same time, an accounts receivable asset account is created on the company’s balance sheet. When you actually pay your bill in March, the accounts receivable account is reduced, and the company’s cash account goes up.
There are several different types of accruals. The most common include goodwill, future tax liabilities, future interest expenses, accounts receivable (like the revenue in our example above), and accounts payable.
All accounts payable are actually a type of accrual, but not all accruals are accounts payable.
Accounts payable is a specific type of accrual. It occurs when a company receives a good or service prior to paying for it, incurring a financial obligation to a supplier or creditor. Accounts payable represents debts that must be paid off within a given period, usually a short-term one (under a year). Generally, they involve expenditures related to business operations. They do not include employee wages or loan repayments.
Under the accrual accounting method, when a company incurs an expensethe transaction is recorded as an accounts payable liability on the balance sheet and as an expense on the income statement. As a result, if someone looks at the balance in the accounts payable category, they will see the total amount the business owes all of its vendors and short-term lenders. When the expense is paid, the accounts payable liability account decreases and the asset used to pay for the liability also decreases.
For example, imagine a business buys some new computer software, and 30 days later, gets a $500 invoice for it. When the accounting department receives the invoice, it records a $500 debit in the office expenses account and a $500 credit to the accounts payable liability account. The company then writes a check to pay the bill, so the accountant enters a $500 credit back to the checking account and enters a debit of $500 from the accounts payable column.