While carrying out the business activities, there may be certain expenses related to the current period that are still to be paid. These expenses are termed Outstanding Expenses. In other words, Outstanding Expenses are those expenses the services in respect of which have already been availed but the payments are not yet made.
For example, salary is to be paid @ Rs 5,000 per month. But, during the year, the salary of only Rs 50,000 is paid by the business. In this case, the salary for the two months of Rs 10,000 (Rs 5,000 × 2) is still to be paid during the year. Thus, here the amount of outstanding salary is Rs 10,000.
When Outstanding Expenses are given outside the Trial Balance
Generally, the information related to the outstanding expenses is given outside the Trial Balance.
Treatment of Outstanding Expenses in the financial statements
First, outstanding expenses are shown on the Debit side of the Trading or Profit and Loss Account as an addition to the related expense.
Secondly, it is shown on the Liabilities side of the Balance Sheet under the head Current Liabilities. It is considered a liability because these expenses are still to be paid.
When Outstanding Expenses are given Inside the Trial Balance
Sometimes, there may be a situation when the outstanding expenses are given inside the Trial Balance. In such a case, these expenses are already adjusted in the concerning expenses. Therefore, there is no need to show them in the Trading or Profit and Loss Account as an addition to the related expenses. These are shown only in the Balance Sheet on the Liabilities Side.
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.