Outstanding expenses are those expenses that a firm incurred but has not paid at the end of its accounting period. Such liabilities ought to be reflected in financial statements for accurate determination of the financial position of the company. Outstanding expenses form a component of the accrual accounting system, which is characterized by the treatment of expenses at the time incurred, rather than paid. Financial statements, therefore, reflect a true and fair view of the obligation of the firm.
Outstanding Expenses Meaning
Outstanding expenses are costs or liabilities that arise to a business at the end of an accounting period but have yet to be paid. These will include, for example, utilities, wages, rent, or interest which have been incurred during the period but have not yet been paid. In the accrual system of accounts, these expenses are matched as liabilities in order to state the real position of the business’s finances.
Example:
At the end of a financial year, a company may have wages payable to its employees that remain unpaid. These unpaid wages are considered outstanding expenses and need to be reported as a liability.
Outstanding Expenses Journal Entry
Recording outstanding expenses journal entries is very essential because financial records will not reveal actual liabilities arising for a business when outstanding expenses are not recorded. When an outstanding expense arose, it became a liability that has not been paid yet. Here is how to record the journal entry for outstanding expenses:
Journal Entry:
For example, if wages of ₹50,000 are outstanding at the end of the year, the journal entry would be:
Wages Expense (Debit): ₹50,000
Outstanding Wages (Credit): ₹50,000
When the outstanding wages are paid in the next accounting period, the reverse entry would be made:
Outstanding Expenses Examples
Outstanding expenses examples include various recurring payments that have been incurred but not yet paid at the end of an accounting period. These expenses commonly occur in both personal and business finances.
Examples of Outstanding Expenses
These examples highlight common cases where businesses need to record outstanding expenses to ensure accurate financial reporting.
- Rent: A business may use office space, but if rent for December is paid in January, it becomes an outstanding expense for the year-end financials.
- Wages and Salaries: If employees have worked but not received their wages at the end of the month, the wages are considered outstanding.
- Utilities: Utilities such as electricity and water bills are often paid after the month ends, making them outstanding expenses.
- Interest on Loans: Any interest due on loans that has not yet been paid by the end of the period is recorded as an outstanding expense.
Outstanding Expenses Under Liability Account
Outstanding expenses would be reported under the liability account in the balance sheet of a firm. Because outstanding expenses represent an obligation that is to be paid by a firm when due, they represent a liability. However, they would be classified as current liabilities because they commonly arise within the next accounting period.
Key Points About Outstanding Expenses as Liabilities
- Current Liability: Outstanding expenses are current liabilities because they are expected to be settled within the company’s normal operating cycle or within a year.
- Matching Principle: The accrual basis of accounting requires that outstanding expenses be recorded to match them with the revenues they helped generate.
- Impact on Financial Statements: Not accounting for outstanding expenses would result in understated liabilities and overstated profits, thus providing a misleading view of the company’s financial health.
By recording outstanding expenses as liabilities, businesses ensure their financial statements reflect their true financial position.
Outstanding Expenses – Debit or Credit?
Outstanding expenses are debited as they arise, so for each outstanding expense incurred, there would be an increase in the expense and liability accounts. When those expenses become due and paid, the credit represents the decrease in cash account and corresponding liability account. This difference is very crucial to ensure proper financial reporting.
Treatment of Outstanding Expenses
On the date of expense, the organization’s expenses have increased, so debit should be raised for the expense account and the outstanding expense account credited, since liabilities have risen.
At the date of payment: The account of expense that was outstanding gets decremented; liability decreases. A cash or a bank account gets credited at the date of payment.
Example:
When Expense Incurred:
When Paid:
Understanding whether an outstanding expense is a debit or credit helps in maintaining accurate and organized financial records.
Conclusion
Accrual accounting is peppered with wonderful concepts, and one of them is outstanding expenses where it allows for ensuring that expenses are recognized in the period that the expense occurred, rather than when they were paid. Accounting properly for outstanding expenses on the financial statements is of paramount importance in showing how a business is really placed financially. These are liabilities for accounts such as rent, wages, and utility bills. They are recognized through journal entry and added as liabilities until they are paid off in the next accounting period. Knowledge of entries for outstanding expenses classified under liabilities would help track a business’s obligations and allow it to make informed financial decisions.
Outstanding Expenses FAQs
What are outstanding expenses?
Outstanding expenses are costs that have been incurred but remain unpaid at the end of an accounting period.
How are outstanding expenses recorded in the journal?
Outstanding expenses are recorded by debiting the expense account and crediting the outstanding expense account.
Are outstanding expenses a liability?
Yes, outstanding expenses are classified as current liabilities, as they represent obligations that need to be settled in the near future.
Can outstanding expenses be recorded in advance?
No, outstanding expenses are recorded when the expense is incurred, not before.
What is an example of an outstanding expense?
An example includes unpaid wages at the end of the accounting period, which are recorded as outstanding expenses.
