How can you treat outstanding expenses in final accounts?

1 What are outstanding expenses?

Outstanding expenses are expenses that you have incurred in the current accounting period, but have not paid yet. For example, you may have used electricity, water, rent, or salaries in December, but the bills or payments are due in January. These are outstanding expenses for December. Outstanding expenses are also known as accrued expenses, because they accumulate over time until they are paid.

3 How to record outstanding expenses in journal entries?

To record outstanding expenses in journal entries, you need to debit the expense account and credit the outstanding expense account. The expense account is the account that relates to the nature of the expense, such as electricity, water, rent, or salaries. The outstanding expense account is a liability account that shows the amount you owe for the expense. For example, if you have an outstanding rent of $1,000 for December, you need to make the following journal entry:

Debit Rent expense $1,000
Credit Outstanding rent $1,000        

This journal entry increases your rent expense and your outstanding rent liability for December.

4 How to record outstanding expenses in ledger accounts?

To record outstanding expenses in ledger accounts, you need to post the journal entries to the respective ledger accounts. Ledger accounts are the individual accounts that show the details of each transaction. For example, if you have an outstanding rent of $1,000 for December, you need to post the journal entry to the rent expense ledger account and the outstanding rent ledger account. The rent expense ledger account will show a debit of $1,000, and the outstanding rent ledger account will show a credit of $1,000. The balances of these ledger accounts will reflect the amount of rent expense and outstanding rent for December.

5 How to show outstanding expenses in the income statement and balance sheet?

To accurately and realistically portray business performance and financial position for the current period, outstanding expenses need to be included in the income statement and balance sheet. For example, if there is an outstanding rent of $1,000 for December, it should be added to the rent expense in the income statement, reducing net profit by $1,000. In the balance sheet, it should be added to current liabilities and subtracted from equity, reducing net assets or net worth by $1,000. Showing outstanding expenses in this way helps to present a comprehensive view of your financials.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?