Adjusting entry for accrued/outstanding expenses

Expenses relating to current period, which have been incurred but not paid at the end of the period are known as outstanding expenses. In other words, services or benefits from these expenses have been received but payments have not been made till the end of the period. For example, a shop at the monthly rent of $500 has been utilized for a month, but the rent for that month has not been paid till the end of the month. The rent for that month is outstanding or accrued at the end of that month. Similarly, suppose that we have utilized the services of an employee for the month of December 2015, but the payment is made on the 5th of January 2016. This salary will be outstanding on December 31. If we do not account for such expenses, the income statement will show higher profit or lower loss due to unrecorded expenditures. In order to get correct results of the income statement, we will have to incur or raise the expenditure on one side and on the other a liability of similar amount will be raised.

Adjusting entry

The adjusting entry for accrued or outstanding expense is made as follows:

adjusting-entry-out-exp-img1

The amount of accrued expense will be added in particular expense in income statement and the same amount will be shown as liability in the balance sheet.

Example

Sam Trading Company closes its books on December 31 each year. The wages amounting to $600 are incurred during the year 2016 but not paid till the end of the year. Make an adjusting entry for this outstanding expense on December 31, 2016.

Solution

adjusting-entry-out-exp-img2

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