Journal entry for outstanding expenses | Example

Outstanding expenses feature image

Journal entry for outstanding expenses are very simple to remember but the application of golden rules of accounting on it is difficult because the Personal rule of accounting is applied on an outstanding expense instead of Nominal rules. Most students or professionals are trying to apply the nominal rule because they treated it as an expense but it is not the expense. It is due but not paid amount of expenses, So it will be treated as liabilities.

So we already know that in the golden rules of accounting there is no specific rule for liabilities like modern rules of accounting. All the liabilities are created with personal rule. so we help you to understand, how to apply the correct golden rules of accounting on the transactions related to the outstanding expenses. The correct rule is the personal rule which is applicable to the transactions related to the outstanding expenses. But first, you have to know the meaning of outstanding expense.

What is Outstanding Expense? 

The outstanding expense means when the business already availed the services from someone during the current period but did not pay him till the end of the current period. The current period may vary as per the financial reporting period of the business i.e. for the month, for the quarter, for the semester or for the year. It will be treated as a current liability for the business. In simple amount due for expense but not paid yet.

Example:

  • Salary and Wages due for the month but not paid.
  • Rent due for the office building but not paid.
  • Electricity charges due but not paid.
  • Auditor Fee due but not paid.

Why do we need to maintain an outstanding expenses account?

According to the Accrual Accounting Principle, the business has to record all expenses and income of the current period in the financial statement/report of the same period to know the exact profit or loss of the same period. Ethier these expenses or incomes are paid/received or not. So this is the main reason which restricts every business to maintain the outstanding expenses accounts.

Click out our full article on the principle of accounting.

Journal entry for outstanding expenses with the golden rule:

The journal entry for the outstanding expense with the golden rules of accounting is a little bit difficult to understand, But I have tried my best in this article to make it easy to understand. So with the help of the following example, you will understand it in an easy way.

Example of Journal entry for creating outstanding expenses with the golden rule:

Salary for the Month of Jan-18 Rs 50,000 due but not paid yet

After scanning the whole journal entry we have found the two accounts:

The first account is Salaries A/c, as we have already discussed in the previous articles the salaries are the expense of the business. So it will be treated as follows:

Name of Account Type of Account The rule will be Applied Effect of a transaction on accounts Condition of Rule applied According to Rule, It will be Dr./Cr.
Salaries  Expense  Nominal Account Availing services from employees All Expenses and losses Debit

The second account is Outstanding Salary A/c (as explained above the amount due but not paid yet will be treated as an outstanding expense) so the personal rule is applied to it

Explanation of the personal rule: there are three types of persons 

  1. Natural Person: It means made by Nature like Mr Ram, Mr sham, Mrs Sita, Miss Gita, etc.
  2. Artificial Person: It means made by the law like Ram & Sons Ltd., HAPPSS Store Ltd., Amazon India Pvt. Ltd., etc.
  3. Representative Person: It means the Representative of a natural person or group of persons. Like: Outstanding expenses a/c represents the individual or group of persons whose amount of expenses is not paid yet to them.

According to the above, the outstanding salaries account will be treated with the help of representative personal rules.

We can understand it step by step:

In 1st step: – the whole month employees provide services to the business and after completion of the month, the amount of the salary becomes due.

2nd step: – The business did not make paid salaries to its employees. but the amount of salary(which is due to employees) is now belonging to the employees because they have earned it after providing service to the business for a month. so they have the legal right to that amount of money.

3rd Step: – The business used their money(due amount of salaries) in other business activities. So indirectly the business took the loan from its employee for some period.

4th Step: – So according to this the employee giving the amount of their salary to the business for some period of time. So they(employees) becomes a giver and according to the personal rule, the giver will be credited.

We have explained the above steps in the following image to understand better.

How the personal rule of accounting applied on outstanding expenses - Journal entry for outstanding expenses | Example
How the personal rule of accounting applied to outstanding expenses

Explanation of the applicability of the rule in the below table:

Name of Account Type of Account The rule will be Applied Effect of a transaction on accounts Condition of Rule applied According to Rule, It will be Dr./Cr.
Outstanding Salaries Representative Person Personal Rule Amount of salaries due but not paid.
The amount used by the business.
Giver Credit

Now, We get the account which will be debited and credited so entry will be posted as shown below:

Date  Particulars  L.F. Debit  Credit  
Salaries a/c                                      Dr. 50,000
To Outstanding Salaries a/c 50,000
(Being salaries due for the month of Jan-18 but not paid yet)

Also, check out the image of the journal entry for the outstanding expenses as follows:

Journal entry for outstanding expenses  - Journal entry for outstanding expenses | Example
Journal entry for outstanding expenses

Journal entry for repaying the liability of outstanding expenses: 

When the actual payment is made for outstanding salaries the following journal entry will be recorded:

Example: –

Outstanding Salaries paid for the Month of Jan-18 Rs 50,000

Name of Account Type of Account The rule will be Applied Effect of a transaction on accounts Condition of Rule applied According to Rule, It will be Dr./Cr.
Outstanding Salaries Representative Person Personal Rule Amount of salaries received by the group of  employees Receiver Debit
Cash Assets Assets Rule cash paid  Goes out  Credit

Now, We get the account which will be debited and credited so entry will be posted as shown below:

Date  Particulars  L.F. Debit  Credit  
Outstanding Salaries a/c               Dr. 50,000
To Cash a/c 50,000
(Being outstanding salaries paid)

Journal entry for outstanding expenses with modern rules.

The journal entry for outstanding expenses with the modern rules of accounting is easy to understand as compared with the journal entry for outstanding expenses with golden rules of accounting. It is explained as under:

Example Journal entry for creating outstanding expenses with modern rules:

Salary for the Month of Jan-18 Rs 50,000 due but not paid yet

The first account is Salaries A/c, as already discusses above the salaries is the expenses of the business. So it will be treated as follows with help of modern rules of accounting:

Name of Account Type of Account The rule will be Applied Effect of a transaction on accounts Condition of Rule applied According to Rule, It will be Dr./Cr.
Salaries  Expense Expenses Rule Expenses Incurred Increase in Expenses Debit

The second account is Outstanding Salary A/c (as explained above the amount due but not paid yet will be treated as an outstanding expense)

Name of Account Type of Account The rule will be Applied Effect of a transaction on accounts Condition of Rule applied According to Rule, It will be Dr./Cr.
Outstanding Salaries liability liabilities Rule An expense due but not paid Increase in liability Credit

Journal entry remains the same as above:

Date  Particulars  L.F. Debit  Credit  
Salaries a/c                                                 Dr. 50,000
To Outstanding Salaries a/c 50,000
(Being salaries due for the month of Jan-18 but not paid yet)

Journal entry for repaying the liability of outstanding expenses: 

When the actual payment is made for outstanding salaries the following journal entry will be recorded:

Example: –

Outstanding Salaries paid for the Month of Jan-18 Rs 50,000

Name of Account Type of Account The rule will be Applied Effect of a transaction on accounts Condition of Rule applied According to Rule, It will be Dr./Cr.
Outstanding Salaries liability liabilities Rule Amount of salaries received by the group of  employees Decrease in liability Debit
Cash Assets Assets Rule cash paid  Decrease in Asset Credit

Now, We get the account which will be debited and credited so entry will be posted as shown below:

Date  Particulars  L.F. Debit  Credit  
Outstanding Salaries a/c               Dr. 50,000
To Cash a/c 50,000
(Being outstanding salaries paid)
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and also Check out this article in the Hindi language from the following link:

Journal entry for outstanding expenses | Example – In Hindi

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