An outstanding expense, also known as an accrued expense, is an expense that has been incurred by a company but has not yet been paid or recorded in the company’s accounting books. It represents an obligation to make a payment for goods or services received but not yet settled as of the reporting date.
Outstanding expenses are a type of current liability, as they are expected to be settled within a short period, typically within one year. They are an essential part of the company’s financial reporting and are recorded in the balance sheet as a current liability.
Common examples of outstanding expenses include:
- Accrued Salaries and Wages: The wages earned by employees for the period but not yet paid at the end of the accounting period are accrued as outstanding expenses.
- Accrued Utilities: Utility bills, such as electricity, water, and gas, that have been consumed but not yet paid are accrued as outstanding expenses.
- Accrued Rent: Rent due for the use of facilities or office space that has not been paid at the end of the accounting period is recorded as an outstanding expense.
- Accrued Interest: Interest on loans or borrowings that has been accrued but not yet paid is treated as an outstanding expense.
- Accrued Taxes: Taxes, such as income tax or sales tax, that are due but not yet paid are recorded as outstanding expenses.
Accounting for Outstanding Expenses:
To account for outstanding expenses, the company makes an adjusting journal entry at the end of the accounting period to recognize the expense in the income statement and record the corresponding liability on the balance sheet. The journal entry typically debits the corresponding expense account and credits the accrued liabilities account.
Upon making the actual payment for the outstanding expenses, the company records another journal entry to reduce the liability and update the cash or bank account. This ensures that the outstanding expense is properly settled and removed from the balance sheet.
Managing outstanding expenses is essential for accurate financial reporting and to reflect the company’s true financial position. Companies must carefully monitor and account for these accrued liabilities to ensure that all expenses are accurately recorded and that the company’s financial statements provide a clear picture of its financial health.