What is an accounting period?

The concept of an accounting period is used to segment the life of a business into equal pieces. Accounting periods must conform to the principle of consistency.

What are final accounts?

The accounts prepared at the final stage of the Accounting Cycle to illustrate the profit or loss and financial position of a business concern are known as the Final Accounts.

What is meant by the term liability?

A liability is a debt or other obligation owed by one party to another party. In more direct terms, it is a payment or obligation for which a company is held liable by another party.

What is a balance sheet?

An accounting balance sheet is a financial document that shows the relationship between a company’s assets, liabilities, and shareholder equity at a particular point in time.

Adjusting Entry for Accrued/Outstanding Expenses

Outstanding expenses are expenses relating to the current period that have been incurred but not paid at the end of the period.

In other words, services or benefits from these expenses have been received but payments are not 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 that a company's accounting period ends on 31 December. The business pays monthly salaries of $10,000 a month after receiving services from employees.

In this way, for the 11 months of 2019, the business has paid salaries amounting to $110,000.

However, the salaries for December 2019 will be paid on 10 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 final accounts:

Outstanding salaries is an expense for 2019 because the services of the employees have been received and will be charged as an expense to the profit and loss account of 2019.
Therefore, this item will be added to salaries on the debit side of the account.
At the same time, the amount of outstanding salaries is still payable. That is to say, it is a liability of the business and will appear as a liability in the balance sheet.

Adjusting Entry

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

Adjusting Entry For Accrued or Outstanding Expenses in Salaries Account

Adjusting Entry for Accrued or Outstanding Expenses in Outstanding Salaries Account

Adjusting Entry for Accrued or Outstanding Expenses in Profit and Loss Account

Adjusting Entry for Accrued or Outstanding Expenses in Balance Sheet

The amount of accrued expenses will be added to the income statement and the same amount will be shown as a liability in the balance sheet.

In the next year, when the salaries are paid, the following entry will be made and the outstanding salaries account will be closed.

Example

A company closes its books on 31 December each year. Wages amounting to $600 are incurred in 2016 but not paid until the end of the year. Make an adjusting entry for this outstanding expense on 31 December 2016.