Journal Entry for Outstanding Expenses

As always before diving into Journal Entry for Outstanding Expenses, let’s lear what are outstanding expenses.

What are outstanding Expenses ?

Outstanding expenses, also known as accrued expenses or liabilities, are expenses that have been incurred but not yet paid or recorded in the accounting records by the end of the accounting period.

These expenses are recognized as liabilities because the business owes payment for them.

Journal Entry for Outstandng Expenses

Journal Entry for Outstanding Expenses in done in a 2 step approach as follow –

When the expense is incurred:

This journal entry recognizes the expense incurred by debiting the Expense account and establishes a liability for the outstanding amount by crediting the Outstanding Expense account.

When the outstanding expense is paid:

This journal entry reduces the liability for the outstanding expense by debiting the Outstanding Expense account and records the payment made by crediting the Cash/Bank Account.

Treatment of Outstanding Expenses in Financial Statements

Balance Sheet:

Outstanding expenses are reported as current liabilities on the balance sheet.

They are typically included under the “Accounts Payable” or “Accrued Liabilities” section.

The outstanding expense amount represents the obligation of the company to make future payments.

Income Statement:

The outstanding expenses are recognized in the relevant expense accounts for the period in which they are incurred.

This ensures that the expenses are matched with the corresponding revenues.

Adjustment related to outstanding expenses.

Accrual Adjustment:

At the end of the accounting period, an adjusting entry is made to recognize the outstanding expense and create the corresponding liability.
This ensures that the expense is properly matched with the revenue generated in the same period.

Reversal Entry:

In the subsequent accounting period when the outstanding expense is paid, a reversing entry may be made to reverse the accrual and eliminate the liability.
This helps in avoiding duplicate recognition

Example#1 of Journal Entry for Outstanding Rent

Let’s assume a company has an outstanding rent expense of $1,000 for the current month:

When the rent expense is incurred

This journal entry recognizes the expense incurred for rent by debiting the Rent Expense account and establishes a liability for the outstanding amount by crediting the Outstanding Rent account.

When the outstanding rent is paid:

This journal entry reduces the liability for the outstanding rent by debiting the Outstanding Rent account and records the payment made by crediting the Cash/Bank Account.

Example#2 Journal Entry for Outstanding Salary or Wages

Let’s assume a company has an outstanding rent expense of $1,000 for the current month:

When the Salary/Wages expense is incurred –

When Outstanding Salary/Wages are paid –

Learn about Journal Entry for Comission Received here.