Accrued expenses vs accounts payable: the difference and the journal entries

The international standard on provisions, IAS 37 (adopted in Australia as AASB 137), draws the same line. Trade payables are for goods or services received or supplied and invoiced or formally agreed with the supplier; accruals are for goods or services received or supplied but not yet paid, invoiced or formally agreed. It notes that accruals sometimes need estimating but carry much less uncertainty than provisions, and are often reported as part of trade and other payables.

For SEC registrants, Regulation S-X has a balance sheet caption for accounts and notes payable, and asks for any other current liability above 5 percent of total current liabilities, such as accrued payrolls or accrued interest, to be stated separately on the balance sheet or in a note. For how AP compares with receivables, see accounts payable vs accounts receivable.

October carries $5,700 of expense even though no bill existed at the close. In November, the reversal and the bill net to $190 of expense, the difference between the estimate and the invoice. Nothing is counted twice, and AP enters the bill exactly as it would any other invoice.

Invoices waiting for approval are the accrual AP controls most directly. If invoices regularly sit in approval past the cut-off, the accrual grows each month. The invoice approval delay calculator estimates how much invoice value is waiting for approval at any time, which is a quick guide to how much may need accruing at month-end.

• Invoices already received. If the invoice is in your inbox or approval queue, accrue the invoiced amount. It is the most accurate estimate you will get.
• Purchase orders and receipts. For goods, accrue the PO price for the quantity received. A PO on its own is not a liability; accrue only what has been received. See goods receipt.
• Contracts and rate cards. For services, multiply the contract rate by the hours, days or units delivered in the month.
• Vendor statements. A statement can show invoices issued but not yet received. See vendor statement reconciliation.
• Last month’s run rate. For steady recurring costs with no better data, use the most recent bill, adjusted for known changes.

Set a materiality threshold so the team does not spend hours estimating small amounts, and record the basis for every estimate so a reviewer, or an auditor, can follow it.

1. 1

   Step 1

   List every cost incurred in the month that is not yet a bill in AP: goods received without an invoice, services delivered, invoices received but still in approval, and recurring costs such as utilities.
2. 2

   Step 2

   Estimate each amount from the best evidence you have: the purchase order and receipt, the contract rate, the hours worked, a vendor statement or last month’s run rate.
3. 3

   Step 3

   Check each item against the AP ledger so nothing is accrued that has already been entered as a bill.
4. 4

   Step 4

   Post one journal entry: debit the expense (or inventory) accounts and credit accrued expenses, dated the last day of the month.
5. 5

   Step 5

   Set the entry to reverse automatically on the first day of the next month.
6. 6

   Step 6

   Keep a schedule of each accrual with its support and preparer, and have someone else review it before the close is signed off.
7. 7

   Step 7

   When the real invoices arrive, enter them in AP as normal and review any large differences between the bill and the estimate.

This is one step in the wider close. For the full sequence of cut-off, invoice entry, accruals and reconciliations, see the AP month-end close checklist.

Accounts payable is more likely to be understated than overstated: a missing invoice or a forgotten accrual makes the balance too low. The search for unrecorded liabilities is the audit test aimed at that risk. A typical approach selects payments made in the weeks after year-end, and invoices received after year-end, and traces each one back to its supporting documents to see when the goods or services were received.

AP can make the search quick by having these ready:

• Subsequent disbursements listing. Every payment made after year-end, with the invoice number, invoice date and the period the goods or services relate to.
• Unprocessed invoices. Invoices received after year-end, and any still in approval, with the service or delivery date.
• Open purchase orders and receiving logs. Receipts before year-end without a matching invoice, which should appear in the accrual.
• The year-end accrual schedule. Each accrual with its basis, support and reviewer, and how it was settled.
• Vendor statement reconciliations. For key suppliers, as of the year-end date.

The AP audit checklist covers the other tests auditors run on payables.

• Forgetting to reverse. If the accrual stays on the books and the bill is entered too, the expense is counted twice. Use automatic reversing entries and check the accrued expenses balance each month.
• Double counting. An invoice entered as a bill in the month and also included in the accrual. Check the accrual list against the AP ledger before posting.
• Accruing without support. A round number with no basis is hard to review and hard to defend in an audit. Every line needs a source document or a written calculation.
• Accruing open POs. An order that has not been delivered is a commitment, not a liability. Accrue receipts, not orders.
• Stale accruals. Balances that roll forward month after month with no bill usually mean a dispute, a cancelled order or an error. Investigate anything older than one or two periods.
• No true-up review. Compare bills with the amounts accrued for them. Consistent large differences mean the estimating method needs fixing.

• Invoices captured as they arrive. Invoices sent to your Aequo AP inbox or uploaded are extracted on receipt, so an invoice in hand at month-end is visible even before it is approved.
• Export by status. Export captured invoices to CSV with supplier, amount, invoice date and approval status, to build the list of invoices received but not yet approved.
• Fewer invoices stuck in approval. Approval rules with reminders and escalation, and a controls monitor that lists invoices waiting more than 48 hours.
• Matched to POs and receipts. Two-way and three-way matching ties each invoice to its purchase order and delivery note, which supports both the accrual and the audit trail.
• Approved bills in one ledger. Approved bills sync to QuickBooks Online, Xero, FreshBooks, Zoho Books or Business Central, so the AP balance you reconcile is the one in your accounting system.

To estimate how much invoice value is waiting for approval in your team, try the invoice approval delay calculator, or see how three-way matching works in Aequo AP.