Outstanding Expenses Prepaid Expenses

Outstanding Expenses | Prepaid Expenses

A) Outstanding Expenses: At the end of the accounting period, there may be expenses which have become due but have not yet been paid. Expenses yet to be paid or outstanding expenses for the current period should be charged against the current period’s income. The extent to which the amount belongs to the current year but payable in the next year is called Outstanding Expenses.

Salaries a/c Dr                           xxx

To Outstanding salaries a/c                xxx

(Being Salaries for the month of March, 2011 due but not yet paid accounted.)

For example: salaries outstanding for Mar. 2011 paid in Apr. 2011 or rent outstanding etc.

B) Prepaid Expenses: At the end of the accounting period, there may be expenses which have been paid in advance. These are expenses which are paid in advance and would be adjusted in the relevant expenditure during the subsequent accounting periods.

Advances paid are treated in a different manner from expenses prepaid, the difference being that the advances are recoverable whereas expenditure prepaid are realized by adjusted them in the amounts to be paid in the future towards the expenditure.

"Accounting Rules"

Real A/c:          Debit what Comes in | Credit what Goes Out.

Personal A/c:    Debit the Receiver | Credit the Giver.

Nominal A/c:     Debit all expenses & losses | Credit all income and gains.

Some points to be noted:-

Expenditure A/c is a Nominal Account with a debit balance. The balance in this account generally indicates the total amount paid on account of the expenditure during the current accounting period. To bring the expenditure that has not yet been brought into account in the books, the relevant expenditure account has to be debited.

Expenses Outstanding A/c is a Personal Account with a credit balance. The balance in the respective account indicates the amount that is owed by the organization on account of the expenditure unpaid. The amount of expenditure that has not yet been paid is a liability for the organization. The person to whom the organization owes is its creditor. As such, the amount of expenditure outstanding that has not yet been taken in the books is credited to the “Expenditure Outstanding a/c.”

The prepaid expenditure is indicative of an amount that is owed to the organization by the person or organization to which it has been prepaid. The persons who owe to the organization are its debtors. Thus the amount of expenditure prepaid is debited to the Expenses Prepaid A/c.