What Is an Outstanding Expense in Accounting?
By Max Chekalov
May 13, 2023
Also known as accrued liabilities, outstanding expenses are as of yet unpaid costs recorded and recognized by the accounting books in the period they are incurred.
For instance, companies are obligated to pay out salaries, rent, supplier fees, etc., as they have profited or are profiting from them before payments are made.
Below, we thoroughly review the topic of outstanding expenses!
Where Do Outstanding Expenses Belong on a Balance Sheet?
According to the guidelines of accrual accounting—the most used method for businesses of any size—accrued expenses are entered on the balance sheets as current liabilities.
After all, outstanding expenses represent the obligations businesses have to fulfill after utilizing products, services, and consultations that are yet to be invoiced.
Simply put, cash assets are converted into liabilities in the same accounting period the benefits were received. While the money remains in the company accounts in such cases, it cannot be used for anything else as it is reserved for these future payments.
Outstanding expenses are a necessary function of any modern double-entry system as they provide a much better and balanced overview of a company’s financial health.
Note: When recorded, accrued expenses may show a slightly different amount than the one shown on the invoice sent out at a later date.
Are Outstanding Expenses a Debit or Credit Entry?
When accounting for outstanding expenses, businesses have to record several journal entries in both debit and credit accounts, as first, they have to record the transaction when the expense is incurred before backing it out when the debt is settled later on.
Also, in the double-entry system, each transaction must be balanced with both a debit and a credit entry. That said, the transaction will initially involve a debit entry to the corresponding expense account and a credit one in the accrued liability account. However, a second reversed entry must also be registered at the time of payment.
Do They Go Into a Profit or a Loss Account?
Yes, outstanding expenses are also recorded on a company’s profit and loss (P&L) statement as well as they must be summarized as expenses when they are incurred.
For example, if a company has the following outstanding expenses: outstanding employee salaries, outstanding rent paid, and outstanding loyalty program rewards, they would go into the separate payroll, rent, and marketing expense accounts of the income statement.
At the same time, since they become liabilities for the business, they will also appear under the corresponding liability category on the balance sheet.
Outstanding Expense Journal Entry Examples
To make things clearer, let’s look at a couple of examples showing how outstanding expenses are recorded in a company’s accounting books:
Example 1
Companies typically pay their monthly salaries a month later. For instance, for work completed in June, a business may owe $100,000 to its employees and will enter that amount as debit in the salary expenses account. However, a corresponding $100,000 entry will also be recorded on the balance sheet under the liabilities account.
A month later, the journal entry for July will show a debit entry of $100,000 in the expense account and a credit one in the cash account for the same amount.
Example 2
A company that spends $1,000 on electricity in February will receive its bill at the beginning of March and be required to pay it by the end of March.
In such circumstances, the February journal will have a $5,000 debit entry in the utility expenses account and an equivalent entry in the accrued expenses account. However, when the bill is finally settled in March, the new Journal will read a debit entry in the accrued expenses account for $5,000 and a credit entry in the cash account for the same amount.
Key Takeaways:
- An outstanding expense is an expense incurred but not yet paid.
- Examples of accrued expenses: rent, salaries, supply fees, etc.
- They are entered as liabilities on the balance sheets.
- Outstanding expenses are charged as expenses on the P&L statement.
- They are entered two times: once when incurred and once when paid.