Prepaid expense in Accounting
    5Mar, 2020
    Prepaid Expense in Accounting and its journal Entry

    Prepaid Expense in Accounting and its journal Entry

    What is prepaid Expense?

    Prepaid expenses are those expenses that are paid in advance. It means the cost of expense is paid but they are not yet used up or incurred. Prepaid expenses are Asset by nature. The prepaid expense comes under the category of Current Assets. They are treated as current assets because most of the prepaid expense is consumed within a month or so. If prepaid expense are not consumed with a particular financial period then they are transferred to the next financial year in the Asset side of the balance sheet under category current assets.
     

    Examples of Prepaid Expense

    Salary paid to Mohan Rs 12000 along with an advance salary Rs 4000. Here Mohan is getting a salary of Rs 16,000 which even includes advance salary, therefore, we have to use the following concept before making a journal entry of Prepaid expense in books of accounts. before we go further we have understood the following concept of accounting. To record the entry of outstanding Expenses in books of accounts we should know that When we ADD Assets in Business we Debit our Asset Similarly, When we ADD Liability in Business we Credit our Liability And When we Minus or deduct Asset in business we Credit our Asset Similar when we Minus or deduct our Liability form business we Debit our liability it can be more clear from the picture given below. asset and liabilities Now as per the above example our Assets to Rs 4000 is created in the books of accounts, therefore, we have to book our Assets by debiting it name given to the current asset can be Advance salary. The journal entry for the above in the books of accounts will be :

    Journal Entry of Prepaid Expense

    Salary paid to Mohan Rs 12000 along with an advance salary Rs 4000. Salary A/c Dr.                 12,000 Advance Salary A/c Dr    4,000 To cash A/c                         16.000 (being salary paid with advance salary ) here Advance salary is paid in advance, therefore, it is treated as Assets under books of Accounts. when it is booked. Example: An insurance premium paid Rs 12000 on 1 Dec 2019. On 1 Dec 2019. the following journal entry is made. Insurance premium A/c Dr 12,000 To Bank/Cash A/c                12000 Now at the end of the accounting year, 31 march 2020 following entry needs to be made. Prepaid Insurance Expense A/c Dr      8000 To Insurance A/c                                       8000 (adjustment of prepaid insurance )

    Prepaid expense under income statement and balance Sheet

    Now in Final Accounts  salary will be shown in the Profit and Loss A/c and Advance salary Rent will be shown in the Asset side of balance sheet shown below Profit and Loss A/c
    Particular Amount Particular Amount
    salary A/c 12,000
     
    Outstanding expense under Balance Sheet
    Liability Amount Asset Amount
    Advance Salary 4000
     

    Adjustment of Prepaid expense

    When Advance Salary is paid salary  A/c Dr.          10,000 Advance Salary A/c Dr   4000 To cash A/c                         14,000 (being salary paid with advance salary ) here we reduce our liability in the next accounting year by paying our dues. now in next month advance salary is adjusted Salary A/c Dr 12,000 To cash A/c                     8000 To Advance Salary A/c     4000 (being salary paid with adjustment of adv. salary)

    Advance expense in Trial Balance :

    Outstanding expense are liability by nature and liability are shown in the credit side of Trial balance Dr.                                                                                                                                            Cr.
    Particular Amount Particular Amount
    Advance salary 4000
         

    Prepaid expense quiz

    Welcome to your prepaid expense

    What is Outstanding Expense in Accounting
    4Mar, 2020
    What is Outstanding Expense in Accounting ?

    Outstanding expenses meaning

    outstanding expense journal entry

    Outstanding Expenses

    What is an Outstanding Expense in Accounting?

    Outstanding Expense is those expenses that are incurred during a particular financial period and due to be paid in the future. However Outstanding expenses are recorded in books to show our liability to pay our due expense in the next financial period or year.

    The recording of outstanding expenses helps to track the dues to be paid in the future.

    Example of Outstanding Expenses

    Example 1.

    Suppose in Financial year 1 April 2019 to 31 Dec 2020 wages paid is Rs. 11000 but the last month wages not paid Rs 1000.

    Therefore wages not paid in a particular financial year are outstanding.

    To record the entry of outstanding Expenses in books of accounts we should know that When we ADD Assets in Business we Debit our Asset Similarly, When we ADD Liability in Business we Credit our Liability And When we Minus or deduct Asset in business we Credit our Asset Similar when we Minus or deduct our Liability form business we Debit our liability ir can be more clear from the picture given below.

    asset and liabilities

    Now as per above example our liability to 1000 is created in the books of accounts, therefore, we have to book our liability by crediting it the journal entry for the above in the books of accounts will be

    Outstanding expenses journal entry

    wages outstanding journal entry

    Wages A/c Dr.    1000

    To O/S Wages A/c    1000

    (Being wages due )

    When outstanding wages is paid .

    Outstanding Wages A/c Dr.  1000

        To cash                                      1000

     Outstanding  Rent journal entry

    Example 2

    Rent

    Rent paid during the year is Rs 1,10,000 rent for the year is Rs 120,000.

    Under such condition

    When Rent is Paid

    Rent A/c  Dr. 1,10,000

    To Cash A/c     1,10,000

    (being rent paid )

    Journal entry for outstanding rent will be

    Rent A/c Dr   10,000

    To O/S Rent A/c   10,000

    (being Rent Outstanding)

     

    Some examples of outstanding expenses

    Question 1.

    A loan is taken from Bank Rs 100000 on 1 Dec 2019. interest payable 12% per annual. FY close on 31 March 2020.

    Case 1

    If Interest paid Rs 2000.

    Answer

    Year loan 100000 X 12% = 12000

    4 month interest 12000/12= 1000 int.=1000X4 = 4000

    Loan taken from Bank Rs 100000 on 1 Dec 2019. interest payable 12% per annual. FY close on 31 march 2020.

    Case 1

    Interest paid

    4000

        To cash A/c

                     2000

      To Interest on loan payable A/c 

                     2000

     

     

    here interest payable is an outstanding expense

    Question 2.

    A loan was taken from Bank Rs 100000 on 1 Dec 2019. interest payable 12% per annual. FY close on 31 march 2020.

    Case 2

    Interest paid Rs 8000.

    Int. on Loan
    Dr

    4000

    Prepaid
    Interest on LoanDr.

    4000

      To  Cash

                     8000

     

    Question 3.

    A loan is taken from Bank Rs 100000 on 1 Dec 2019. interest payable 12% per annual. FY close on 31 March 2020.

    Case 3

    No interest paid

     

    Int. on Loan Dr

    4000

          To Interest on loan payable A/c 

                     4000

     

     

     (outstanding expense)

    Outstanding expense in case of the bill received not paid.

    Suppose we received a bill of mobile Phone  Rs 10,000 on 1 December 2020 and paid on 15 December 2020.

    When a bill is received on 1 Dec. we have to note it down in books of accounts.

    Mobile Phone exp. Dr.   10,000

       To Mobile phone bill payable     A/c                                        10,000

    (being mobile phone bill received and payable )

    When a bill is paid on 15 December.

    Mobile phone bill payable A/c 10,000

       To Cash A/c     10,000

    (being bill paid)

    Ledger of Outstanding expense

    Outstanding expense is liability by nature therefore its have credit balance means its credit side is more than the debit side lets understand it with the example given below

    Suppose Salary not paid for the month is Rs 10,000

    Journal entry for the above will be 

    Salary A/c Dr.     10,000

    To outstanding Salary A/c    10,000

    (being salary not paid)

     

    when we post the entry in the ledger of outstanding expense then 

    Outstanding Expense Ledger 

    Particular

    Amount

    Particular

    Amount

      

    By salary A/c

    10,000

    To balance  C/d

    10,000

    		  
     

    10000

    		 

    10000

    Therefore Oustanding expense is liability because it has credit balance.

     

    Outstanding Expense in Profit and loss accounts or Income statement

    Outstanding expense is an expense not paid for this year therefore it is added to debit side of the expense made.

    Example salary not paid during the year 5000 that need to be added to salary 12000.

    Particular

    Amount

    Particular

    Amount

    To salary 12000

    + outstanding Salary 5000

    17000

    		  

    Outstanding expense in BalanceSheet

    Outstanding expenses is asset or liability.

     

    Outstanding Expense is liability therefore it is shown in the liability side of balance sheet and therefore it transferred to next accounting year

    Liability

    Amount

    Assets

    Amount

        

    O/S Expense

    XXXX

    		  
        

    Adjustment of Outstanding Expense

    Understand with example

    January Salary paid Rs 5000 actual salary Rs .10000.

    It means Salary 5000 is not paid it is outstanding or payable.

     

     

    Salary A/c Dr.

    10000

        To Cash A/c

         5000

        To outstanding Salary  A/c

         5000

    Being salary paid and outstanding written

    February salary paid with adjustment of last month salary.

    In this month we pay salary with outstanding salary not paid last month.

    The journal entry for the above will be.

    Salary A/c Dr.

    10000

     Outstanding Salary  A/c

     5000

               To Cash   A/c

         15000

    Being salary paid with outstanding

    outstanding expenses are current liabilities

    they are those  debts or obligations that are due to be paid to creditors within one year

    Differentiate between outstanding expense and prepaid expense

    Outstanding expense

    Prepaid expense

    Outstanding expense are expense not

    Paid.

    Prepaid expense is expense

    Paid in advance

    Outstanding expense are credited when due.

    Like

    Salary A/c Dr.   xxxx

      To outstanding salary or salary payable A/c xxx

    (Being salary due)

    Prepaid expense is debited when paid in advance

    Like

    Advance salary / prepaid salary  A/c xxx

        To cash A/c              xxx

    (Being salary paid in advance)

    Adjustment of outstanding expense

    Adjustment of prepaid expense

    When outstanding expense is paid it is debited

    When prepaid expense is paid it is credited

    Outstanding salary A/c  xxx

       To cash A/c                   xxx

    (Being due paid )

    Salary A/c                  xxxx

    To advance salary A/c         xxxx

    (Being advance salary adjusted)

    Outstanding expense is liability

    Prepaid expense is Assets

    Outstanding expense have Credit balance

    Prepaid expense have debit balance

    Outstanding expense is added to trading or  profit and loss accounts

    Prepaid expense is deducted in the debit side of trading or profit and loss accounts.

     

    The key points about outstanding expenses

    • Outstanding expenses are also known as accrued expenses or accrued liabilities.
    • They represent expenses that a company has incurred but has not yet paid as of the end of the accounting period.
    • Outstanding expenses are recorded under the accrual basis of accounting, recognizing expenses when incurred, not when paid.
    • Examples of outstanding expenses include unpaid salaries, utility bills, rent, and interest on loans.
    • They are recorded as a current liability in the balance sheet and as an expense in the income statement.
    • Adjusting entries are made at the end of the accounting period to record outstanding expenses accurately.
    • Failure to record outstanding expenses can lead to understating expenses and overstate profits.
    • Outstanding expenses are eventually paid in a subsequent accounting period, reducing the liability.
    • Proper recognition of outstanding expenses ensures accurate financial reporting.
    • The company’s financial statements should disclose the nature and amount of outstanding expenses.

     

    FAQ of outstanding Expense

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    What is the Balance of outstanding expenses?

    The outstanding expense has a credit balance means when we create a ledger of outstanding expenses its Credit side is more than the Debit balance.

    Why outstanding expense is a liability and why it is shown in the profit and loss accounts?

    Outstanding expense it liability because it’s our obligation to pay in near future We cannot keep it pending for a long time and we have to pay them.

    It is shown in the Profit and loss accounts and added to expense because it is the expense of Accounting which are for one year and to find the true or actual profit we need to add it in particular expense.

    what if outstanding expenses are shown in the Trial balance?

    If outstanding expense is shown inside the trial balance it means the outstanding expense is already adjusted and we need not to show them in the profit and loss account we can show them only in the Balance sheet on the Liability side.

    Short MCQ outstanding Expense quiz

    Welcome to your Outstanding expense Quiz

    outstanding salary journal entry in Accounting
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    Journal Entry of Outstanding salary and Prepaid Salary In Accounting

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