Outstanding Expenses

Introduction: What is an Outstanding Expense?

Outstanding expense refers to expenses that have not been paid by a business yet. Usually, businesses do not pay all expenses when they incur them. Some expenditures are made at the end of the year or at some other decided time. These expenses are known as outstanding expenses.

As is clear from the above note, outstanding expenses are liabilities that the business must pay at a given time. Businesses keep account of these expenses so that they can meet their expenses in due course of time. There are some select methods of keeping a record of outstanding expenses. Outstanding expenses show how much a business has to pay to stakeholders in monetary terms.

Outstanding Expenses in Accounting

Outstanding expenses are treated as personal accounts with a credit balance. These are liabilities which has not been paid yet. These expenses are shown in the liabilities section of the balance sheet. Accurate accounting practices require the knowledge of whether these payments have been paid or not.

An outstanding expense is actually an expenditure that is due but has not been paid yet. The payments become outstanding when the benefit has been served but the payment for the services is not paid by a company. It must be noted here that although outstanding expenses are offered to a company so that the company can have some time to pay, the payments must be made at some selected time. So, companies must keep an eye on these payments that are due in the future. An example of an outstanding expense is rent that is yet to be paid.

Outstanding Expenses of Businesses

Businesses usually do not pay all dues when they take a service or a benefit from another entity. These payments are kept or recorded as payments due in the future. Businesses need to treat these expenses as outstanding expenses that must be paid in the future. In the case of businesses too, a payment becomes outstanding when the benefit of a service has been acquired but the price of that service has not been paid. Outstanding expenses must be kept under control because in the case outstanding expenses become unmanageable the businesses may become inoperative in due course of time.

Examples of Outstanding Expenses

Some examples of outstanding expenses are as follows −

• Energy bills that are due but not paid yet.

• Subscriptions due but unpaid yet.

• Rent that is due but not paid yet.

In the balance sheet, outstanding expenses are recorded under the head of current liability. Outstanding expenses are expenditures of the current account period that have not been paid by a company. Therefore, these expenditures should be treated as expenses payable by the company.

Some other examples of outstanding expenditures include outstanding tax, outstanding salary, outstanding service fee, outstanding wages, etc. These unpaid expenses are recorded as outstanding expenses in the books of account at the end of the financial year so that the businesses can have an eye on the accurate figure of payments that must be paid by the business in due course of time. As mentioned above, outstanding expenses are expenses of a personal account which is treated as a liability for the businesses. That is why these expenses are shown on the liability side of the balance sheet.

Outstanding Expenses - should they be credited or debited?

Outstanding expenses are a type of personal account with a credit balance that is considered a liability. They are recorded on the liability section of a balance sheet. Any expense that is due yet is a liability of the business, and the entity to whom the organization owes the payment is called a creditor. So, the amount of outstanding expenditure that has not yet been taken into the books is credited to the Expenditure Outstanding account.

Treatment in Profit and Loss Account

Outstanding expenses are the ones that have been incurred but have not been paid yet. These expenses are connected to an accounting period in which they have not been paid. Such expenses that are due in the current accounting year but will be paid in the next accounting year are recorded as Outstanding Unpaid expenses in the profit and loss account.

For a clear accounting point of view, the outstanding expenses that are due in the current year but will be paid in the coming year are recorded in the current accounting year. The outstanding expenses are shown on the liabilities side of the balance sheet. The outstanding expenses like all other expenses are treated against the profit made by the business. So, these payments must be deducted from the profits made by the organization in the current year.

After posting the journal entry for the unpaid expenses, they are placed appropriately in the final accounts. The treatment for unpaid expenses in the Income statement and balance sheet are as follows −

Financial Statement	Treatment
Balance Sheet	Show under the head “Current Liabilities.”
Income Statement	Add to the relevant Expense account.

Journal Entry of Outstanding Expenses

The outstanding expenses are due in the current accounting period but are not paid in the same. In the case of such expenses, the service or benefit has been taken but the payments for the service have not been made yet.

The following table summarizes the Journal Entry of outstanding expenses −

Expense A/c	Debit	Debit the increase in expenses.
To outstanding expense A/c	Credit	Credit the increase in liability.

As shown above there are two accounts for the outstanding expense of an organization - the expense account and the outstanding expense account.

Outstanding expenses are an obligation for a company; so they are treated as a liability. The rules applied to modern journal entry includes “Credit the increase in liability,” and “Debit the increase in expenses.”

The journal entry includes both debit and credit to avoid overstatement of entries as these are unpaid liabilities due in the future.

Conclusion

Keeping an eye on outstanding expenses is important for all types of businesses. When outstanding expenses go out of control, it may be hard for a business to continue its operations. Moreover, businesses should aim to pursue as few outstanding expenses as possible because these expenses must be met from the profits of the organization.

FAQs

Qns 1. What is meant by outstanding expenses?

Ans. Outstanding expense refers to expenses that have not been paid by a business yet. Usually, businesses do not pay all expenses when they incur them. Some expenditures are made at the end of the year or at some other decided time. These expenses are known as outstanding expenses.

Qns 2. Are outstanding expenses liabilities? Why?

Ans. Outstanding expenses are expenditures that must be done in the future. So, they are treated as liabilities.

Qns 3. What is the modern rule for Journal entries of outstanding expenses?

Ans. The rules applied to modern journal entry includes “Credit the increase in liability,” and “Debit the increase in expenses” for outstanding expenses.