What’s the difference between Accounts Payable and Accrued Expenses?
a. They work the same mechanically, but Accounts Payable is used more often for one-time expenses that have associated invoices, whereas Accrued Expenses is more for recurring expenses without invoices.
b. When Accounts Payable decreases you reflect a cash payout on the statements, but when Accrued Expenses decreases you don’t need to do that.
c. When Accrued Expenses increases you show an expense on the Income Statement and add back the non-cash charge; you do the opposite for Accounts Payable.
d. They are the same in both meaning and mechanics.
ANSWER is A.
Explanation: They work the same in terms of accounting mechanics – when they increase, you increase Income Statement expenses but then on the Cash Flow Statement you subtract them out because you haven’t paid anything in cash yet. And when they decrease, you leave the Income Statement alone but reduce the Balance Sheet
Thats the explanation it gives, but i thought when liabilities increase, like accrued expenses, CF goes up. In the explanation, it is saying that you subtract it out (from the Cf statement) when it accrued expenses goes up? And then Accrued Expenses goes down, you leave the income statement alone?
Can someone please make this clear for me? Thank you.
Accrued expenses is recurring - think of salaries that are going to be paid at the end of every month. Accounts Payable is a one time thing - e.g. my office printer broke down so I'm gonna buy one with credit. You aren't going to buy a printer every week.
I get that, thanks. I'm talking about explaining the following:
"They work the same in terms of accounting mechanics – when they increase, you increase Income Statement expenses but then on the Cash Flow Statement you subtract them out because you haven’t paid anything in cash yet. And when they decrease, you leave the Income Statement alone but reduce the Balance Sheet line item and reduce cash on the other side of the Balance Sheet to reflect the cash payout."
I thought when liabilities increase, like Accrued expenses, cash flow goes up (and that you don't subtract it from the Cf statement)?
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