Outstanding Expenses and Prepaid Expenses

Outstanding (Accrued) Expenses

Meaning: an expense that has been INCURRED during the year (the benefit has been consumed) but has NOT yet been PAID by the closing date — e.g. wages for the last week of March, unpaid at year end.

Double effect:

1. Added to the relevant expense in the Profit and Loss Account (the expense figure shown in the Trial Balance understates the TRUE expense for the year, since the unpaid portion was never recorded).
2. Shown as a Current Liability in the Balance Sheet (the business owes this amount).

Prepaid (Unexpired) Expenses

Meaning: an expense that has been PAID during the year, but part of it relates to a FUTURE period — e.g. an annual insurance premium paid in October covering the following six months beyond the accounting year's close.

Double effect:

1. Deducted from the relevant expense in the Profit and Loss Account (the expense figure in the Trial Balance overstates the TRUE expense for the year, since part of it was paid for a future period).
2. Shown as a Current Asset in the Balance Sheet (the business has already paid for a benefit it will receive next year — a genuine resource, even though it will not turn into cash).