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Accounts payable vs accrued expenses

What is the difference between accounts payable and accrued expenses? Or are accounts payable and accrued expenses one and the same thing? They are closely related, but not completely the same. ⏱️TIMESTAMPS⏱️ 0:00 Introduction 0:12 Accounts payable and accrued expenses in the financial statements 0:30 Accounts payable and accrued expenses definitions 1:43 Accounts payable and accrued expenses examples 2:37 Case study: Coca-Cola 4:18 Case study: Facebook 6:31 Accounts payable and accrued expenses summary Where do you find accounts payable and accrued expenses in the financial statements? Both are found on the balance sheet, more specifically in the current liabilities section on the right. Current Liabilities are amounts due to be paid to creditors within twelve months. If you search the internet for a definition of accounts payable, you will probably find something like: money owed by a company to its creditors. If you search for a definition of accrued expenses, you will probably find something like: expenses that a business has incurred but has not yet paid. That’s somewhat helpful, but does not set them apart too much. A more useful definition of accounts payable is: invoices from suppliers that haven’t been paid yet. And for accrued expenses: liabilities for which invoices have not (or not yet) been received. That’s a lot better! The key difference is whether an invoice has been received (accounts payable), or whether an invoice has not yet been received (accrued expenses) or, due to the nature of the liability, will never be received (accrued expenses). You could say that in some, but not all, cases accrued expenses is “one step before” accounts payable. As soon as an invoice is received from a supplier, amounts move from accrued expenses to accounts payable. Let’s understand the terms better by going through some examples of what’s actually “in there”. We will review the current liabilities part of the balance sheets of two well-known consumer brand companies, whose products or services some of us use on a daily basis: the Coca-Cola company, and Facebook. Coca-Cola had current liabilities at year-end 2019 of $27 billion. Facebook had current liabilities at year-end 2019 of $15 billion. The interesting thing in terms of financial statement presentation is that the Coca-Cola company has aggregated accounts payable and accrued expenses into one line item on the balance sheet, whereas Facebook has split them into two separate line items. But fear not, the notes to the financial statements give us more specific information in both cases, so we can analyze both companies at the same level of detail. Accounts payable and accrued liabilities. Important elements of current liabilities. The amount and the nature of the balances are highly dependent on the business operations of the company you review. Some balances are incidental (one-off), others recurring. They often tell an interesting story of what is happening at the company. Philip de Vroe (The Finance Storyteller) aims to make #accounting, #finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!