How Are Outstanding Expenses Shown in the Balance Sheet?
Outstanding expenses are an important concept in accounting that refers to expenses which have been incurred during an accounting period but have not yet been paid by the business. These are amounts the business owes for goods or services already received. Such expenses are considered liabilities and are always recorded on the liability side of the balance sheet. Understanding their treatment is essential for accurate financial reporting and maintaining the true position of the business.
Meaning and Characteristics of Outstanding Expenses
Outstanding expenses represent financial obligations for payments that are due but not yet settled. In simple terms, these are expenses like rent, salary, wages, or subscriptions that remain unpaid at the end of a financial period. Since the business has already received the benefit, the unpaid amount becomes a liability. Recording such expenses ensures that all costs related to a period are accounted for, regardless of when actual payment occurs.
These expenses are classified as current liabilities since they are expected to be paid within the normal operating cycle, usually within a year. The outstanding expense is a type of personal account with a credit balance—a key accounting principle for such liabilities.
Examples of Outstanding Expenses
Some common examples of outstanding expenses include:
- Outstanding Salaries: Employee salaries pending at period-end.
- Outstanding Rent: Rent due but not yet paid to the landlord.
- Outstanding Wages: Wages due for work done but not paid yet.
- Outstanding Subscriptions: Subscriptions received but not yet paid for services used.
Accounting Treatment and Journal Entry
To record outstanding expenses, two main accounts are involved:
- The Expense Account (e.g., Salary, Rent)
- The Outstanding Expense Account (recognized as a liability)
The standard journal entry is:
- Expense Account Dr.
To Outstanding Expense Account
Here, the increase in expense is debited, and the increase in liability is credited. This ensures expenses are not understated in the Profit and Loss account, and the liability gets reflected in the balance sheet.
Stepwise Approach to Handling Outstanding Expenses
- Identify expenses incurred but unpaid by the period end.
- Determine the total outstanding amount.
- Pass the correct journal entry as shown above.
- Include the outstanding amount in the expense while preparing the income statement.
- Present the outstanding expense under current liabilities in the balance sheet.
Key Principles and Practical Application
Outstanding expenses must be accounted for in the period they are incurred, not necessarily when they are paid. This aligns with the accrual basis of accounting, ensuring that the profit or loss for the period is not overstated or understated. Accurate accounting of outstanding expenses also allows stakeholders to view the exact liabilities of a business at any point.
Table: Journal Entries for Outstanding Expenses
| Transaction | Journal Entry | Explanation |
|---|---|---|
| Salary due but unpaid | Salary A/c Dr. To Outstanding Salary A/c |
Records salary incurred in current period but unpaid |
| Rent due but unpaid | Rent A/c Dr. To Outstanding Rent A/c |
Records rent benefit received but payment pending |
Table: Balance Sheet Presentation
| Item | Side | Head | Nature |
|---|---|---|---|
| Outstanding Expenses | Liabilities | Current Liabilities | Due, but unpaid |
Concept Example
Suppose the salary of ₹15,000 is due but unpaid at the period-end. The journal entry would be:
- Salary A/c Dr. ₹15,000
- To Outstanding Salary A/c ₹15,000
On the balance sheet, ₹15,000 will be shown under the head “Current Liabilities” as Outstanding Salary.
Table: Difference Between Outstanding and Accrued Expenses
| Particulars | Outstanding Expenses | Accrued Expenses |
|---|---|---|
| Meaning | Expenses incurred but not yet paid | Expenses accumulated over time, not yet paid |
| Balance Sheet Treatment | Shown as current liability | Shown as current liability |
Next Steps and Vedantu Resources
For further practice and in-depth learning, explore:
- Download structured materials from Vedantu Accountancy Notes
- Solve additional problems in accountancy practice questions
Summary
Outstanding expenses are critical for reflecting true liability and accurate profit in accounts. They ensure that financial statements reflect all costs related to the period, whether paid or not. Appropriate understanding and recording of outstanding expenses help avoid errors in profit calculation and financial reporting.
FAQs on Outstanding Expenses Explained for Commerce Students
1. What does outstanding expense mean?
Outstanding expenses are amounts that a business has incurred for goods or services received, but has not yet paid by the end of the accounting period.
• These are shown as current liabilities on the balance sheet.
• Examples include: outstanding salary, rent, or electricity bills.
• Such expenses must be recognized to ensure accurate financial reporting.
2. Is outstanding expense a liability?
Yes, outstanding expense is a liability because it represents an amount owed by the business to outsiders for expenses already incurred but not yet paid.
• It is classified as a current liability on the balance sheet.
• The business must settle these dues in the near future.
3. How to show outstanding expense in balance sheet?
Outstanding expenses are shown on the liabilities side of the balance sheet, under Current Liabilities. This indicates the amount still payable by the business for the current period.
Example presentation:
• Current Liabilities: Outstanding Salary, Outstanding Rent, etc.
4. What is the journal entry for outstanding expenses?
The journal entry for outstanding expenses involves increasing both the relevant expense and the liability:
• Expense Account — Dr.
• To Outstanding Expense Account
This entry ensures both the expense and liability are properly recorded.
5. What is the difference between accrued and outstanding expenses?
Both accrued and outstanding expenses refer to amounts due but unpaid.
Key differences:
• Outstanding expenses: Incurred, recognized, and unpaid at the period end.
• Accrued expenses: Incurred, but not yet recorded or invoiced, and not paid.
Both are treated as current liabilities in the balance sheet.
6. Outstanding expenses is asset or liability?
Outstanding expenses are a type of liability for the business. They show the obligation to pay for services or goods already received. These are included under current liabilities in the balance sheet.
7. Give examples of outstanding expenses.
Common examples of outstanding expenses are:
• Outstanding Salary
• Outstanding Rent
• Outstanding Wages
• Outstanding Interest
• Outstanding Electricity Bill
All represent amounts due but not yet paid.
8. Under which group should outstanding expenses be classified in Tally?
In Tally, outstanding expenses are grouped under:
• Current Liabilities
This ensures proper accounting of dues not yet settled by the business.
9. How are outstanding expenses treated in final accounts?
Outstanding expenses are treated as follows in final accounts:
• Added to the related expense in the income statement (Profit & Loss Account).
• Shown as current liabilities on the balance sheet.
This ensures completeness of expense recognition and liability reporting.
10. What is the accounting rule for recording outstanding expenses?
The accounting rule for outstanding expenses is:
• Debit the increase in expense (Expense A/C)
• Credit the increase in liability (Outstanding Expense A/C)
This follows the modern rules of accounting for correct financial reporting.
11. Why should outstanding expenses be accounted for at year-end?
Outstanding expenses must be accounted for at year-end to ensure:
• All expenses relating to the period are recorded
• Accurate profit calculation
• True representation of liabilities
This matches expenses to the correct accounting period, maintaining accuracy.
12. How does passing outstanding expense entries affect financial statements?
Passing entries for outstanding expenses:
• Increases expenses in the Profit & Loss Account, reducing reported profit
• Increases current liabilities in the balance sheet
This results in more accurate financial reporting and liability recognition.
