State the meaning of: (a) Outstanding expenses (b) Prepaid expenses (c) Income received in advance (d) Accrued

Short Answer Questions · Q3

Q. State the meaning of:

(a) Outstanding expenses

(b) Prepaid expenses

(d) Accrued income

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Concept understanding — Accrual Basis Accounting

Accrual Basis Accounting – A First Look

Think about a newspaper delivery. You pay for a month's subscription at the start. The newspaper company gets your money on 1st April, but it hasn't earned that money yet — it still has to deliver papers for the next 30 days. The company's profit for April isn't the cash it collected; it's the revenue from the papers actually delivered in April.

That's the core intuition behind accrual accounting: record income when it is earned, not when cash is received; record expenses when they are incurred, not when cash is paid.

The Precise Meaning

Under the accrual basis, transactions are recorded in the books of account at the time they occur, regardless of when the actual cash changes hands.

Revenue is recognised when the goods are sold or services are rendered — even if the customer will pay later.
Expenses are recognised when the benefit is consumed or the liability arises — even if the payment will be made later.

This is the opposite of cash basis accounting, where you record only when cash is received or paid.

Important

The accrual basis is mandatory under the Companies Act, 2013 for all companies, and it is the foundation of the Generally Accepted Accounting Principles (GAAP) followed in India.

Why It Matters

Accrual accounting gives a true and fair view of the business's financial performance and position.

Matching Principle: Expenses are matched with the revenues they help generate in the same period. If you sell goods in March but receive payment in April, the sale belongs to March's profit calculation, not April's.
Realistic Profit: Profit under accrual basis reflects the actual economic activity of the period, not just the timing of cash flows.
Better Decision-Making: Owners, investors, and creditors see what the business has earned and owes, not just what it has in the bank.

Watch out

A common mistake: thinking profit equals cash in hand. Under accrual accounting, a business can show a healthy profit but have very little cash (if most sales are on credit), or show a loss but have plenty of cash (if it collected old debts while making few new sales).

Accounting Treatment – The Journal Entries

Accrual accounting gives rise to two special types of accounts: Outstanding Expenses and Accrued Incomes (also called Prepaid Expenses and Unearned Incomes on the other side).

1. Outstanding Expenses (Expense incurred but not yet paid)

Example: Salary for March is ₹50,000, but it will be paid in April.

Journal Entry (at the end of March):

Date	Particulars	Debit (₹)	Credit (₹)
March 31	Salary A/c Dr.	50,000
	To Outstanding Salary A/c		50,000
	(Being salary for March due but not paid)

Debit: Salary A/c (expense is recorded in the period it belongs to)
Credit: Outstanding Salary A/c (a liability — the business owes this money)

When paid in April:

Date	Particulars	Debit (₹)	Credit (₹)
April 10	Outstanding Salary A/c Dr.	50,000
	To Cash/Bank A/c		50,000
	(Being outstanding salary paid)

2. Accrued Income (Income earned but not yet received)

Example: Commission earned ₹20,000 in March, but will be received in April.

Journal Entry (at the end of March):

Date	Particulars	Debit (₹)	Credit (₹)
March 31	Accrued Commission A/c Dr.	20,000
	To Commission Income A/c		20,000
	(Being commission earned but not received)

Debit: Accrued Commission A/c (an asset — the business is owed this money)
Credit: Commission Income A/c (revenue is recorded in the period it was earned)

When received in April:

Date	Particulars	Debit (₹)	Credit (₹)
April 15	Cash/Bank A/c Dr.	20,000
	To Accrued Commission A/c		20,000
	(Being accrued commission received)

3. Prepaid Expenses (Expense paid in advance)

Example: Insurance premium of ₹12,000 paid on 1st January for the full year.

Journal Entry (at the end of the accounting year, say 31st March):

Only 3 months' insurance (Jan–Mar) has been used. The remaining 9 months' worth (₹9,000) is still an asset.

Date	Particulars	Debit (₹)	Credit (₹)
March 31	Prepaid Insurance A/c Dr.	9,000
	To Insurance A/c		9,000
	(Being insurance prepaid for the remaining period)

Debit: Prepaid Insurance A/c (asset)
Credit: Insurance A/c (reduces the expense to only the consumed portion)

4. Unearned Income (Income received in advance)

Example: Rent received ₹30,000 on 1st March for three months (March, April, May).

Journal Entry (at the end of March):

Only one month's rent (₹10,000) has been earned. The remaining ₹20,000 is a liability.

Date	Particulars	Debit (₹)	Credit (₹)
March 31	Rent Income A/c Dr.	20,000
	To Unearned Rent A/c		20,000
	(Being rent received in advance for April and May)

Debit: Rent Income A/c (reduces the income to only the earned portion)
Credit: Unearned Rent A/c (liability — the business owes the service)

Format in Financial Statements

These accrual adjustments appear in the Profit and Loss Account and the Balance Sheet.

Profit and Loss Account (extract)

Particulars	Amount (₹)	Particulars	Amount (₹)
Expenses:		Incomes:
Salary (including outstanding)	50,000	Commission (including accrued)	20,000
Insurance (after deducting prepaid)	3,000	Rent (after deducting unearned)	10,000

Balance Sheet (extract)

Liabilities	Amount (₹)	Assets	Amount (₹)
Current Liabilities:		Current Assets:
Outstanding Salary	50,000	Accrued Commission	20,000
Unearned Rent	20,000	Prepaid Insurance	9,000

A Formula That Appears in Practice

For calculating interest on capital (a common accrual adjustment in partnership accounts):

Interest on Capital = Capital × Rate of Interest × (Period / 12)

For example, if a partner's capital is ₹2,00,000 and interest is allowed at 10% per annum for 6 months:

Interest = 2,00,000 × 10/100 × 6/12 = ₹10,000

This interest is an expense for the firm (debited to Profit and Loss Appropriation A/c) and income for the partner (credited to the partner's Capital/Current A/c), even if no cash changes hands — a perfect example of accrual accounting in action.

The Big Picture

Accrual basis is not just a rule — it is the language that tells the true story of a business. Cash is just one character in that story. The real plot is about when value is created, when obligations arise, and when economic benefits are actually earned or consumed. Every journal entry you will learn in Class 12 — from depreciation to provision for doubtful debts — is built on this foundation.

These four adjustments apply the accrual concept: two relate to expenses (outstanding and prepaid) and two relate to incomes (received in advance and accrued), each with a definite effect on the Profit & Loss Account and the Balance Sheet.

Outstanding expenses. Expenses which have been incurred (their benefit consumed) during the current accounting year but which have not yet been paid by the end of the year — for example, salaries or rent for the last month still due. Treatment: added to the relevant expense in the Profit & Loss A/c and shown as a current liability in the Balance Sheet.
Prepaid (unexpired) expenses. Expenses that have been paid during the current year but whose benefit relates wholly or partly to the next year — for example, insurance premium paid for a period extending beyond the year-end. Treatment: deducted from the relevant expense in the Profit & Loss A/c and shown as a current asset in the Balance Sheet.
Income received in advance (unearned income). Income received during the current year but which has not yet been earned because it relates to the next year — for example, rent received in advance. Treatment: deducted from the relevant income in the Profit & Loss A/c and shown as a current liability in the Balance Sheet.
Accrued income (outstanding income). Income that has been earned during the current year but has not yet been received — for example, interest on investments due but not yet collected. Treatment: added to the relevant income in the Profit & Loss A/c and shown as a current asset in the Balance Sheet.

Item	P&L A/c effect	Balance Sheet
Outstanding expense	Add to expense	Liability
Prepaid expense	Less from expense	Asset
Income received in advance	Less from income	Liability
Accrued income	Add to income	Asset

✓Final answer

Outstanding = expense incurred but unpaid (liability); Prepaid = expense paid in advance (asset); Income received in advance = received but unearned (liability); Accrued income = earned but not received (asset).

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Only cash transactions are recorded on$
(a) cash basis
(b) accrual basis
(c) both (A) and (B)
(d) purchase book
›Reveal solutionSolution

Only cash transactions are recorded on the cash basis.

Under the cash basis, income and expenses are recognised only when cash is actually received or paid; the accrual basis instead records them when earned or incurred.

✓Final answer
$Cash basis.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Outstanding expense is that$
(a) which will not be paid
(b) which has been paid
(c) which will be paid
(d) none of these
›Reveal solutionSolution

An outstanding expense is one which will be paid.

It relates to the current period and has become due but remains unpaid at the year-end, so it is a liability still payable.

✓Final answer
$Which will be paid.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Which of the following is not an expense?$
(a) Wages A/c
(b) Rent paid
(c) Advance wages paid
(d) Wages paid for repairing
›Reveal solutionSolution

Advance wages paid is not an expense.

Wages, rent paid and wages paid for repairing are expenses of the period, but advance (prepaid) wages relate to the next period and are a current asset until they become due.

✓Final answer
$Advance wages paid.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. Basis of Accounting is$
(a) Cash basis
(b) Accrual basis
(c) Both (A) and (B)
(d) None of these
›Reveal solutionSolution

The basis of accounting is both cash basis and accrual basis.

Under cash basis only cash dealings are recorded; under accrual basis income/expense is recorded when earned/incurred. Both are valid bases of accounting.

✓Final answer
$Both cash basis and accrual basis.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. Prepaid expenses given in the Trial Balance are shown in$
(a) Trading A/c
(b) Profit & Loss A/c
(c) Balance Sheet
(d) None of these
›Reveal solutionSolution

Prepaid expenses in the trial balance are shown in the Balance Sheet.

An item inside the trial balance goes to only one statement; prepaid (unexpired) expenses are a current asset, so they appear on the assets side of the Balance Sheet.

✓Final answer
$Balance Sheet.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. Cash basis of accounting is adopted by$
(a) Profit making organisations
(b) Not for profit organisations
(c) Both (A) and (B)
(d) None of these
›Reveal solutionSolution

Cash basis of accounting is adopted by not-for-profit organisations.

Bodies like clubs and charitable institutions generally keep accounts on a cash basis (Receipts and Payments Account), while profit-making concerns normally use the accrual basis.

✓Final answer
$Not for profit organisations.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. Closing stock is appearing in the Trial Balance. It is shown in the financial statement$
(a) In Balance Sheet
(b) In Profit & Loss A/c
(c) In Trading A/c
(d) In Trading A/c and Balance Sheet
›Reveal solutionSolution

Closing stock appearing in the trial balance is shown in the Balance Sheet only.

When closing stock is inside the trial balance it means purchases have been reduced by it, so it is not entered in the Trading Account again; it appears only as a current asset in the Balance Sheet.

✓Final answer
$In Balance Sheet.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. Outstanding Expenses are that$
(a) which will not be paid
(b) which have been paid
(c) which will be paid
(d) none of these
›Reveal solutionSolution

Outstanding expenses are those which will be paid.

They are expenses of the current period that remain unpaid at the year-end and are therefore a liability still payable.

✓Final answer
$Which will be paid.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. Which of the following is not a basis of accounting?$
(a) Accrual basis
(b) Cash basis
(c) Both
(1) and
(2)
(d) Credit basis
›Reveal solutionSolution

Credit basis is not a basis of accounting.

Transactions are recorded either on cash basis (when cash moves) or accrual basis (when income/expense accrues). There is no separate 'credit basis' of accounting.

✓Final answer
$Credit basis.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. Outstanding expenses is that$
(a) which will not be paid
(b) which has been paid
(c) which will be paid
(d) none of these
›Reveal solutionSolution

Outstanding expenses are those which will be paid.

They relate to the current period, have been incurred/become due, but remain unpaid at the year-end; being a liability, they are still payable.

✓Final answer
$Which will be paid.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2020Set ANNUAL1 markMCQ
$Q. Basis of Accounting is$
(a) Cash basis
(b) Accrual of accounting basis
(c) Both
(1) and
(2)
(d) None of these
›Reveal solutionSolution

Accounting rests on two bases: cash basis and accrual basis.

Under cash basis only actual cash receipts and payments are recorded; under accrual basis income and expenses are recorded when earned/incurred regardless of cash. Both are recognised bases of accounting.

✓Final answer
$Both cash basis and accrual basis.$
JAC Jharkhand Intermediate First Year Class 11 (Commerce) 2020Set ANNUAL1 markMCQ
$Q. Outstanding wages is shown in Trial Balance. It is shown in$
(a) Trading A/c
(b) Profit & Loss A/c
(c) Balance Sheet
(d) Trading A/c & Balance Sheet
›Reveal solutionSolution

Outstanding wages shown in the trial balance appears in the Balance Sheet.

An item inside the trial balance is placed in only one financial statement. Outstanding wages is a current liability (already added to wages in a prior adjustment), so it is shown on the liabilities side of the Balance Sheet.

✓Final answer
$Balance Sheet.$

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Q.State the meaning of:

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