Just because you own a small business doesn’t mean you’re an expert bookkeeper. It does mean, however, that some accounting elements are inevitably a part of your day-to-day. So, if you find many financial terms—say, accounts payable (AP) and expenses—confusing and have a hard time distinguishing between them, know that you’re not alone. Even financial professionals sometimes find it confusing.
We've already covered the difference between assets and liabilities, ACH bank transfers and wires, as well as B2B and B2C. Now, we’re ready to dive in and clear up any mixup about whether accounts payable are the same as expenses.
TL;DR: AP and expenses are two different things
While they both refer to money that is spent by a company for business purposes, accounts payable and expenses are separate entries in different financial statements.
Accounts payable are invoices that are due soon and are listed on your balance sheet as a type of liability. Expenses, on the other hand, are payments that were already made and are listed on your income statement.
What are accounts payable?
Accounts payable are open bills or invoices from vendors and suppliers for goods and services already provided. This means they’re a type of short-term debt owed by the business to its vendors. Accounts payable are typically billed with net terms and payment is due within 30-90 days.
Where to list accounts payable in your financial statements
Accounts payable are a form of short-term debt as they are invoices for items already received by the business but not yet paid for. As such, AP go on the company’s balance sheet under current liabilities.
Be sure not to confuse accounts payable with accounts receivable (AR), which are listed as assets on the balance sheet.
What are expenses in accounting?
In our personal lives, we typically use the word expenses to mark anything that costs us money. But, in accounting, everything has to be a little bit more complicated.
As a financial term, expenses only refer to payments already made for goods and services that have been provided to the business. In other words, they only refer to completed transactions, where both parties have fulfilled their obligations.
Where to list expenses in your financial statements
Expenses are listed on your income statement, which details expenditure vs. revenue. This document includes every payment coming in or out of the business.
Alongside the balance sheet, a financial statement offers a clear view of a business’s monetary situation and net worth. It is required by auditors as well as potential partners, lenders, and investors as part of a standard due diligence process.
What about accrued expenses?
Accrued expenses are what we meant when we said nothing is ever really simple in accounting. Accrued expenses actually refer to goods or services that have already been consumed by the business but have not been billed or invoiced yet.
These include, for example, payments for utilities, rent, or wages that are only invoiced at the end of a specified period, agreed upon by both parties. This typically happens on a month-by-month, quarterly, or annual basis. So, your phone bill is an accrued expense, because it refers to calls you’ve already made but will only be invoiced at the end of the month.
While they’re called expenses, since they refer to future bills, accrued expenses are a form of debt and are listed as liabilities on your balance sheet. However, because they have not been invoiced yet, they are not accounts payable.
Bookkeeping made simple
Now that you know the difference between expenses and AP, keeping your books in order should be a little bit easier.
If you need a simple online tool to manage your accounts payable and send out payments to vendors, sign up for Melio today. It’s free and can save you hours of work every week.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.