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. Show 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. ExampleSuppose 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 TreatmentOutstanding expenses have the following two effects on final accounts:
Adjusting EntryThe adjusting entry for accrued or outstanding expense is made as follows: 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. ExampleA 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. Solution
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. 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.
Unpaid salaries are salary liabilities that you have incurred but have not paid. You must record all accrued salaries, employment taxes and related compensation expenses in the same period in which they are incurred. If there is a gap between the date of the last payroll deposit and the date on which you prepare the financial statements, make an adjusting journal entry to record the incurred salary expense. A company’s journal contains a chronological record of financial transactions.
Companies incur additional salary-related liabilities in the form of payroll taxes and benefits. These liabilities include federal, state and local taxes, Federal Insurance Contributions Act taxes, retirement savings-plan contributions, health-care premiums and insurance. Debits increase asset and expense accounts; they also decrease revenue, liability and shareholders’ equity accounts. Credits decrease asset and expense accounts; they also increase revenue, liability and shareholders’ equity accounts.
You may use cash-basis accounting if you are a small business with a limited number of shareholders. Record a payroll expense only on the day of the payroll deposit; there is no need to adjust entries. Software spreadsheets and accounting packages can make calculations easier, especially if you have several employees at different pay grades.
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Writer Bio
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute. |