The article “Outstanding Expenses Journal Entry” suggests that the journal entry relates to expenses that have not been paid but incurred.
Confused?
Let’s break it down.
A business thrives based on credit allowed by its suppliers and permitted credit to its customers. So, the entity incurs expenditures without the actual requirement of clearing the payment at the exact moment. There is a credit period for clearing dues.
Therefore, businesses can settle the expenditures within that credit period. The word “outstanding” implies that an expenditure has been incurred and payment is due.
Estimated reading time: 8 minutes
Table of contents
How about an example here?
Facts of the Scenario
Loss Company is in the restaurant business. The major expenses are staff salaries, rent, electricity, maintenance charges, and the cost of vegetables, fruits, and groceries.
The company policy is to pay the staff salary, Maintenance, and grocery bills (all outstanding expenses) on the 5th of the next month. The current month is May.
May’s expenditure, which will be payable in June, is $10 million, and April’s expense paid in May is $9 million.
The restaurant must present its monthly final accounts (Balance sheet, Profit and loss, and cash flow statements) to its board of directors, which means closing the books of accounts.
The Problem
As the May expenses are not paid in the same month, the accountant thinks the current (May) month expenses will be $9 million.
Does this approach sound good?
Nope. It’s against the matching concept of presenting the current period expenses along with income.
Even though there is a delay in payment, the expenses or income that need to be accounted for shall be as per the actual current period data. So, the current expenses in the above example shall be $10 million.
Outstanding Expenses Journal Entry
Understanding Outstanding Expenses Journal Entry
When recording the Outstanding expenses entry in the Journal, there are several different steps involved. Those steps include identifying the GL accounts, finding out which accounting rules apply to them, and implementing them. Let’s get right down to covering each one of these processes.
What are the GL Accounts involved in this transaction?
Two GL accounts that are part of this transaction are – Expenses GL and Outstanding Expenses GL.
What are the applicable rules?
Every field has its canon of guiding rules and principles. There is no exemption from accounting.
We must adhere to the fundamental principles of accounting. Let’s examine the regulations that apply to each GL.
Outstanding expense GL being a liability account falls into the category of a Personal account. The other one is an expense GL and it relates to the Nominal Account Category.
Do you remember the 1st and 3rd Golden Rules of Accounting?
First Rule
It relates to the personal and liability accounts: “Debit the Receiver and Credit the Giver.”
Third Rule
It relates to the Nominal accounts, which say that – “Debit all Expenses and Losses and Credit all Incomes and Gains”
From the above, we can infer that this rule comes into play in the Profit and Loss statement.
Accounting equation
Debit Side: Debit all Expenses for the total amount because it’s a nominal account.
Credit Side: Business incurs expenditure and is due. So, there is a requirement to pay by the entity that incurs it. Therefore, the liability account will be on the credit side.
Practical Example to Understand the Outstanding Expenses Calculation:
We have understood the accounting concept. But, arriving at the best estimate of outstanding expenses is challenging, especially if it involves variable expenses. This is because variable expenses will not have any standard or base to estimate.
For example, an entity provides a facility to its employees for claiming reimbursement of commuting expenses. An accurate estimate is not possible as there is no standard base. These will not be known until the actual expenses are incurred.
How about an example of how the estimation process works?
Example 1
A Ltd company is a second-hand Car dealer known for its multi-brand car repair services. The Company’s significant expenditures for repair services are salaries for automobile mechanics, electricity, and water charges.
The Company clears the expenses once every three months. It helps in ensuring adequate working capital flow for the business. The details of expenses are:
- Fixed Salaries – $800,000
- Variable expenses – These are based on the service repairs performed each month. The Company records the variable expenses for each month as outstanding. Settlement happens every quarter.
Number of car service repairs performed – 15,000
Based on historical data, the Company determined an average estimate of all the variable expenses per Car Service –
- Electricity – $50
- Water Charges – $25
Total Variable Expenses – 15,000*75 = $11,25,000
Accountants estimate and record expenses as accruals in the books of accounts.
Journal Entry
Let’s see the outstanding expenses journal entry-
Runners Insight
In General, the Car service Centre will not show a breakdown of electricity and water charges. Instead, they charge a blanket amount from the customer. However, companies adopt different methods to estimate accurately based on their experience and industry data.
The above illustration helps readers understand how companies estimate expenditures. In other words, there isn’t any formula for the estimate method; it varies based on the expenses being estimated.
Example 2
For instance, if the company policy reimburses all commuting expenses between the office and the employee’s home.
Will there be any probable estimate?
The answer would be no. It’s not possible.
Employees might choose Two-Wheeler services, Cabs, Public transport, etc.
The best way is to take the previous year’s actuals and add some percentage for inflation.
How about if that’s the first year of implementing the reimbursements?
The Company will list the total number of employees and consider 20 Km as the average distance between office and home. Then, the total estimated costs are as below:
Estimate = Number of Employees * Cab Charges for 20 KM * 2
Companies might add 15% to this, considering the peak charges levied by Cabs. Thus, expense estimation is driven by many factors.
Benefits of Recording an Outstanding Expense Journal Entry
- Recording outstanding expense journal entries brings several benefits to any business organization. The details are below
- Tracking all the outstanding expenses accurately and recording those promptly in the appropriate ledger allows businesses to maintain accurate records of payments due and outstanding balances.
- Accounting of these expenses can help identify late outstanding payments more quickly, which can help improve cash flow. The quick cash inflow into the business reduces the working capital requirement, lowering interest costs.
- Proper Recording of outstanding expenses helps to have a checkpoint on the related items such as interest on overdue payments, bank charges, etc., enabling companies to keep their finances organized.
- Investing in a Sound, outstanding expenses journal entry system (refer below) is essential for safeguarding effective bookkeeping for any business.
- Additionally, we can monitor outstanding expenses over time to identify if certain expenses are becoming more frequent
Thus, using an outstanding expense journal entry benefits the company’s financial health.
What do you mean by a Sound outstanding expenses journal entry system?
- Understand the type (E.g., Yearly, Half yearly, or Monthly) and nature (E.g., Insurance expenses, Power consumption) of accounting entries that need to be recorded.
- Start keeping a running list of all transactions. This list should contain all transaction details such as amount, date, Invoice/PO number, and vendor details. An Excel Spreadsheet is a great tool for these kinds of Jobs.
- Accounting software can reduce your manual work to some extent. We can also generate a list of transactions from it. It might not give you an exclusive list, as new transactions occur in the current period, but it can serve as a good starting point for keeping those lists.
- Generally, the business records all the Outstanding expenses on a day near the end of the month. So, ensure all the expenses in the list are posted on the last Friday/Working day of the month.
- Proper review of those entries should be part of the process. The reviewer should be independent of the preparer.
- Have a Checkpoint as well. These expenses are routine. So, the total of all current month/period outstanding expenses posted shall equal or be near the amount of the prior month’s expense.
Conclusion
Outstanding Expenses are expenses incurred but not paid. The Journal entry will debit the expenses and credit the liability. It’s best to name the expenses and liability accounts with a more identifiable description/name.
Outstanding Expenses Journal Entry
What’s the journal entry for recording the expenses paid?
So, this entry debits the expense GL and credits the bank GL, while the outstanding expenses account cancels out.
Recommended Articles
The best way to learn the Journal entry is to memorize the three golden rules of accounting and practice as much as possible different Journal entries. So, we have a list of different entries below for better understanding:
