Expenses relating to the 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 until the end of the period. In fact, the benefits of these expenses have been received during the current accounting period, but they have not been actually paid in the current year.
Suppose, the accounting period of business ends on 31st December and business pays monthly Salaries of $10,000 in the next after getting the services. In this way so far the business has paid Salaries $1,10,000 for 11 months of 2019. But the salaries of the employees for the month of December 2019 will be paid on the 10th of January 2020. Now the salaries of December 2019 $10,000 will be treated as “Outstanding Salaries” of 2019.
Outstanding expenses have the following two effects on the final accounts:
- “Outstanding Salaries” is an expense of 2019 because services of the employees have received and will be charged as an expense to the Profit and Loss Account of 2019. so “Outstanding Salaries” will be added in Salaries on the debit side of Profit and Loss Account.
- At the same time the amount of “Outstanding Salaries” is payable yet. It is a liability of the business and will appear as a liability in Balance Sheet.
The adjusting entry for accrued or outstanding expense is made as follows:
The amount of accrued expense will be added in particular expense in the income statement and the same amount will be shown as a liability in the balance sheet.
Next year when salaries will be paid the following entry will be made and “Outstanding Salaries Account” will be closed.
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.