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.
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.
Let’s start off with Coca-Cola.
Note 10 to the financial statements.
$11.3 billion of accounts payable and accrued expenses at year-end 2019,
versus $9.5 billion the year before.
One of the largest line items is accounts payable (invoices from suppliers that have
been received but not paid yet).
Its balance went up significantly from $2.7 billion to $3.8 billion.
An example of working capital management.
In a footnote, the company explains: “The increase in accounts payable in 2019 was primarily
driven by extending payment terms with our suppliers.”
Next line item is accrued marketing expenses.
Sounds logical for a company that is very brand-driven to have a balance there.
Accrued marketing expenses represent the balance sheet liability for marketing costs that have
been incurred but for which an invoice has not (or not yet) been received.
Next line item is “other accrued expenses”.
“Other” in the sense of: not listed individually as a separate line item.
No further information is given in the annual report on what’s in this balance.
Next: “accrued compensation”, these are liabilities of salary and wages that are earned
by the employees or the company’s management, but are not paid (or payable) yet.
And the last material one to highlight: “accrued sales, payroll and other taxes”.
Specific types of taxes due within the next twelve months.
Let’s move over to Facebook.
No further detail on the accounts payable balance, but lots of additional information
on accrued expenses and other liabilities in note 9 to the financial statements.
This number has more than doubled year-over-year: from $5.5 billion to $11.7 billion.
The list starts off with an unusual item: $5.55 billion of accrued legal settlements.
In other words, two legal settlements agreed but not paid yet.
This is explained in more detail in note 11 legal matters.
The quick summary of the largest one is: In July 2019, Facebook entered into a settlement
and modified consent order to resolve the US Federal Trade Commission inquiry, which
is pending federal court approval.
Among other matters, the settlement with the FTC requires Facebook to pay a penalty of
$5.0 billion and to significantly enhance its practices and processes for privacy compliance
and oversight.
Facebook has recognized the penalty in accrued expenses and other current liabilities on
the consolidated balance sheet as of December 31, 2019.
After this unusual item, the first recurring item is “accrued compensation and benefits”.
Just like at Coca-Cola, this represents liabilities of salary and wages that are earned by the
employees or the company’s management, but are not paid (or payable) yet.
Next up is “accrued property and equipment”.
Facebook continues to invest in data centers, servers, office buildings, and network infrastructure.
On the assets side of the balance sheet, $10 billion of the total $35 billion of property
and equipment is labeled as “construction in progress” at year end 2019.
“Accrued property and equipment” represents the liability for CapEx spending incurred
but not billed and paid yet.
The list closes off, just like at Coca-Cola, with accrued taxes and other current liabilities.
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.
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