Accountancy · Ch 9 — Financial Statements - II
Outstanding Expenses
Outstanding Expenses
Outstanding Expenses
It is common for a business to have some expenses that remain unpaid at the end of an accounting year. These arise in the normal course of operations — typical examples are wages, salaries, and interest on loan that have been incurred but not yet paid.
When an expense of an accounting period remains unpaid at the end of that period, it is called an outstanding expense. Because this expense relates to the earning of revenue during the current year, it must be charged against that year's revenue. Otherwise, the profit or loss for the year would be incorrect — expenses would be understated and profit would be overstated.
Accounting Treatment
The journal entry to bring an outstanding expense into the books is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Concerned Expense A/c | Dr. | xxx | ||
| To Outstanding Expense A/c | xxx |
This entry does two things:
- It debits the expense account, increasing the total expense for the year.
- It credits a new account called Outstanding Expense Account, which is a liability.
The outstanding expense account appears on the liabilities side of the balance sheet as a current liability.
Effect on the Trading and Profit & Loss Account
The amount of the outstanding expense is added to the total of that expense under its particular head in the Trading and Profit & Loss Account. This ensures that the full expense incurred during the year is matched against the revenue earned.
Worked Example: Ankit's Wages
From Ankit's trial balance, wages are shown at ₹8,000. Suppose Ankit owes ₹500 as wages relating to the year 2016-17 to one of his employees. The correct expense on wages is ₹8,500 (₹8,000 + ₹500), not ₹8,000.
The adjusting journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Wages A/c | Dr. | 500 | ||
| To Wages Outstanding A/c | 500 |
In the Trading and Profit & Loss Account, the wages are shown as:
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2017
| Expenses/Losses | Amount (₹) | Revenues/Gains | Amount (₹) | ||
|---|---|---|---|---|---|
| Purchases | 75,000 | Sales | 1,25,000 | ||
| Wages | 8,000 | ||||
| Add: Outstanding wages | 500 | 8,500 | Closing stock | 15,000 | |
| Gross profit c/d | 56,500 | ||||
| 1,40,000 | 1,40,000 | ||||
| Salaries | 25,000 | Gross profit b/d | 56,500 | ||
| Rent of building | 13,000 | Commission received | 5,000 | ||
| Bad debts | 4,500 | ||||
| Net profit (transferred to Ankit's capital account) | 19,000 | ||||
| 61,500 | 61,500 |
Notice that the net profit is reduced to ₹19,000 because of the outstanding wages. Without this adjustment, the profit would have been higher by ₹500.
Balance Sheet Presentation
The outstanding wages appear as a current liability in the Balance Sheet:
Balance Sheet of Ankit as at March 31, 2017
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Owners Funds | Non-Current Assets | ||
| Capital | 12,000 | Furniture | 15,000 |