Adjusting entry for accrued/outstanding expenses

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.

Example

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.


Accounting Treatment

Outstanding expenses have the following two effects on the final accounts:

  1. “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.
  2. 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.
Also Check:  Final Accounts

Adjusting entry

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

(i)

Adjusting entry for accrued or outstanding expenses

(ii)

Adjusting entry for accrued or outstanding expenses in salaries account

(iii)

Adjusting entry for accrued or outstanding expenses in outstanding salaries account

(iv)

Adjusting entry for accrued or outstanding expenses in profit and loss account

(v)

Adjusting entry for accrued or outstanding expenses in balance sheet

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.

Adjusting entry for accrued or outstanding expenses example

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

2 thoughts on “Adjusting entry for accrued/outstanding expenses”

Leave a Comment