Accounting services tracks all money coming in and out. A crucial piece of this is knowing what debts you have remaining. Unpaid bills of this type are known as outstanding expenses. The outstanding expenses journal entry also accounts for these unpaid expenses in your books. This entry indicates that you have utilized a service or product and have yet to make a payment. This is useful for making real financial statements. This provides a good perspective on your current liability. This is a helpful details for all learning accountancy; however, Indian students who are preparing for exams or using it as the books for the small business.
What is Outstanding Expense?
Unpaid expenses are expenses incurred but not yet paid. You must still pay them. This is referred to as current liabilities on your books. It is essential for balance sheets and profit and loss accounts to be correct.
You incur an expense in March if you use something like electricity or pay rent in March, but pay for it in April. It means that you have received the benefit but that you have not paid the money yet. This is quite common in real life. The most common examples are rent, wages, salary, telephone bills, and electricity.
Accounting uses an accrual system. With this system, you record income and expenses as they occur, rather than when the cash changes hands. So, if rent is due in March but you pay it in April, it should still be reflected in the March’s books. And that’s when outstanding expenses enter the picture.
In other words, outstanding expenses represent amounts owing to others for services already rendered. These are logged on the liability side of the balance sheet. If you pay later, you update the record. This is what keeps the records straight.
Outstanding Expenses Journal Entry
Journal entry of outstanding expenses keeps the books neat and accurate. If an expense occurs but you haven’t paid it yet, you still need to record it. This indicates your company has consumed but not yet paid for something.
For example, if you owe salaries for March, but you will be paying in April. This expense you have to record in the March books. You make an outstanding expenses journal entry here. Above all, this makes it visible both your cost and your liability.
Outstanding Expenses Journal Entry Format
Here is the format you use:
| Particulars | Debit | Credit |
| Salaries A/cTo Outstanding Salaries A/c(Being salary due but not paid) | 10,000 | 10,000 |
In this journal:
- Your cost is the expense account, which you debit.
- To establish that you owe this money, you book the outstanding account.
When to Use This Entry?
- Use this entry in the below cases:
- Unpaid rent at the end of the month
- Salary unpaid at month-end
- Services pre-usage (before they monthly bill)
With this journal, you’re keeping it real. You book the expense when incurred, not when you pay it. Then, later when you actually pay, you pass another entrance.” This entry is also beneficial for Tally accounting software. Similarly, this will be defined, Journal Voucher in Tally
Outstanding Expenses Journal Entry Example
An easy way to record journal entries is to first specify the type of expense. It can be well understood with examples. These will help you see how to use this in real life. There are various entries pass in case of outstanding expenses as shown in examples below:
Example 1: Outstanding Rent
You have already taken office space for March. The rent is ₹15,000. You will pay in April.
Journal Entry:
| Particulars | Debit | Credit |
| Rent A/cTo Outstanding Rent A/c(Being rent due but unpaid) | 15,000 | 15,000 |
So this shows that rent is an expense and you owe this amount.
Example 2: Outstanding Salary
You need to pay ₹20,000 salary for March to your staff. You will pay next month.
Journal Entry:
| Particulars | Debit | Credit |
| Salary A/cTo Outstanding Salary A/c(Being salary due but unpaid) | 20,000 | 20,000 |
During exams or while performing real accounting work, you can simply use this example.
Example 3: Bills for Unpaid Telephone
March telephone bill of ₹2,500 is still unpaid.
Journal Entry:
| Particulars | Debit | Credit |
| Telephone Expenses A/cTo Outstanding Telephone A/c(Being telephone bill unpaid) | 2,500 | 2,500 |
These males give you a good idea about how to do outstanding expenses and income journal entry. Income can also be exceptional, such as when you have not yet received interest revenue.
Outstanding Expenses Journal Entry for Expenses Paid
You will pay for some expenses, but you are still waiting for payment from your customers. When you pay any overdue expense afterwards, you must post another journal entry. This journal entry eliminates the liability and records the payment.
Example: Make Balance Salary Payment
You already noted ₹20,000 as the outstanding salary. Now, you pay it in April.
Journal Entry:
| Particulars | Debit | Credit |
| Outstanding Salary A/cTo Cash/Bank A/c(Being salary paid against of the year) | 20,000 | 20,000 |
You record a debit in the liability account and a credit in the cash/bank account. This pays off the previous total amount due. This is journal entry for outstanding expenses paid for fund transfer and accounts payable.
You can pass in Payment Voucher section of Tally Choose the appropriate ledger for the bill outstanding and payment type.
You will always need to pass two entries:
- Expenses incurred (not yet paid)
- When the charge is paid later
Journal Entries for Outstanding and Prepaid Expenses
Outstanding and prepaid expenses both adjust your books. One shows pending costs. The other depicts future payments. Outstanding expense is a liability and prepaid expense is an asset when paid in advance.
Let us make clear what the difference is:
Outstanding Expenses
- Expenses due but not paid
- These are liabilities
- Example: Rent due for March
Journal Entry:
- | Rent A/c | Dr. |
- | To OL Din (as on 31.03.2016) | 9,283 Cr. |
Prepaid Expenses
- Expenses paid in advance
- These are assets
- For example: paid insurance for next year
Journal Entry:
- | Prepaid Insurance A/c | Debit |
- | To Insurance A/c | Cr. |
Such entries reflect the reality of your profit and loss. You only display the price for how long.
| Expense Type | Nature | Journal Entry (Debit → Credit) |
| Outstanding Expense | Liability | Expense A/c → Outstanding Expense A/c |
| Prepaid Expense | Asset | Prepaid Expense A/c → Expense A/c |
You need to know how both work together, they are tested as such. In Indian examination very common question asked to journalize outstanding and prepaid expense entries.
Outstanding Expenses & Prepaid Expenses Journal Entry in Tally
Tally is accounting software used by many students and businesses. Using tally outstanding expenses can be recorded by debiting relevant expenses account and crediting ledger account for the same. Let us check how to record both type of expenditure in Tally.
For Outstanding Expenses
- Go to Accounting Vouchers
- Select Journal Voucher (F7)
- In Books of Entries, debit the Expense account (e.g. Rent A/c)
- Supply the Outstanding account (set up under Current Liabilities)
For Prepaid Expenses
- Go to Accounting Vouchers
- Select Journal Voucher (F7)
- Account Prepaid Debit (create under Assets Current)
- To Debit the Expense account (for example Insurance A/c)
Ledgers are updated automatically in Tally. Review reports to understand your outstanding and prepaid expenses. This app is really helpful for small business owners and students practicing accounting. With automation, outstanding expenses journal entry in tally will be easier than manual entry.
Relevance to ACCA Syllabus
Financial Accounting (FA) and Financial Reporting (FR) papers in ACCA cover:Outstanding expenses journal entry Under accrual accounting — in which expenses not yet paid (accrued expenses) are liabilities — students will need to prepare financial statements.
Outstanding Expenses Journal Entry ACCA Questions
Q1. Year-end is the time we report salary payable as outstanding. Which account is open?
A) Salary Expense
B) Salary Payable
C) Cash
D) Capital
Answer: B) Salary Payable
Q2. What effect does the failure to record outstanding rent have on financial statements?
A) Liabilities are overstated
B) Profit is overstated
C) Assets are understated
D) Cash is understated
Answer: B) Profits are overstated
Q3. By the end of March, ₹12,000 rent is still pending. What is the journal entry?
Dr Rent Expense ₹12,000; Cr Prepaid Rent A/c ₹12,000
B) Rent A/c Dr. ₹12,000; Cash A/c Cr. ₹12,000
C) Dr Outstanding Rent A/c ₹12,000; Cr Rent A/c ₹12,000
D) Dr O/S Rent A/c ₹12,000; Cr Rent A/c ₹12,000
Ans: C) Dr Rent A/c ₹12,000; Cr Outstanding Rent A/c ₹12,000
Q4. In what section of the balance sheet are outstanding expenses displayed?
A) Current Assets
B) Fixed Assets
C) Capital
D) Current Liabilities
Ans: D) Current Liabilities
Q5. What accounting principle mandates the recording of accrued expenses?
A) Consistency
B) Prudence
C) Accrual
D) Going Concern
Answer: C) Accrual
Relevance to US CMA Syllabus
This theme is found in Part 1: Financial Planning, Performance and Analytics. Under accrual basis accounting (includes pending liabilities) CMAs have to record, regulate, and report accurate operating expenses.
Outstanding Expenses Journal Entry US CMA Questions
Q1. When should you make the journal entry for an expense under accrual accounting?
A) When paid
B) When ordered
C) When earned
D) When incurred
Answer: D) When incurred
Q2. What happens if you do not record an outstanding utility bill?
A) Overstated cash
B) Overstated income
C) Overstated liabilities
D) Overstated assets
Ans: B) Overstated income
Q3. What is the adjusting entry for an unpaid salary of $6,000?
A) Dr Cash; Cr Salary Expense
B) Dr Salary Expense; Cr Salary Payable
C) Dr Salary Payable; Cr Salary Expense
D) Dr Prepaid Salary; Cr Salary Expense
Ans: B) Dr Salary Expense; Cr Salary Payable
Q4. From which statement salary payable is shown?
A) Income Statement
B) Cash Flow Statement
C) Balance Sheet
D) Statement of Equity
Answer: C) Balance Sheet
Q5. Which of the following is an example of an accrued expense?
A) Loan received
B) Rent paid in advance
C) Salary due but unpaid
D) Sales made on credit
ANSWER: C) Salary due but unpaid
Relevance to US CPA Syllabus
This means the FAR (Financial Accounting and Reporting) section in US CPA is all about preparation of financial statements according to GAAP. Double entry accounting methodology for unrecorded expenses allows accurate presentation of accrued liabilities.
Outstanding Expenses Journal Entry US CPA Questions
Q1. When a company records unpaid rent at year-end, what is the effect?
A) Assets increase
B) Equity increases
C) Expenses increase
D) Revenues increase
Ans: C) Expenses increase
Q2. What GAAP principle justifies recording payable expenses?
A) Conservatism
B) Matching
C) Realization
D) Cost
Answer: B) Matching
Q3. Which entry clears an outstanding expense when it is paid?
A) Dr Expense; Cr Cash
B) Dr Cash; Cr Liability
C) Dr Liability; Cr Cash
D) Dr Asset; Cr Liability
Ans: C) Dr Liability; Cr Cash
Q4. When an accrued liability is recognized:
A) Receives a future payment
B) An asset is purchased on credit
C) Expense incurred but not paid
D) Inventory is purchased
Answer: C) An expense has been incurred which has not been paid
Q5. What statement is correct with respect to an outstanding expense?
A) It is a prepaid expense
B) It is a future obligation
C) It is a non-current asset
D) It is part of revenue
Answers: B) It is a future obligation
Relevance to CFA Syllabus
Found in CFA Level I – Financial Reporting and Analysis, exceptional expenses are forming solution of income quality and need to be understood in order to modify income and compute accurate income streams during analysis.
Outstanding Expenses Journal Entry CFA Questions
Q1. In which account type is outstanding expenses recorded?
A) Revenue
B) Asset
C) Liability
D) Equity
Answer: C) Liability
Q2. What happens to the income if accrued expenses are missed?
A) Understated
B) No effect
C) Overstated
D) Cannot determine
Answer: C) Overstated
Q3. What effect does an increase in the outstanding expenses have on working capital?
A) It increases
B) It decreases
C) It stays the same
D) It becomes zero
Answer: B) It decreases
Q4. Outstanding liabilities have the greatest impact on which financial analysis ratio?
A) Inventory turnover
B) Return on Equity
C) Current Ratio
D) Gross Margin
Answer: C) Current Ratio
Q5. Analysts adjust net income for expenses that are still owed:
A) Overstate earnings
B) Get cash from operations
C) Eliminate liabilities
D) Avoid tax
Answer: B) Generate cash from operations
