Understanding All About Outstanding Expenses

Outstanding expenses refer to a type of personal account having a credit balance and it is treated as a liability for a business firm. These expenses are represented on the liability side of the balance sheet of the business.

Outstanding expenses must be realized whether they are paid or it is performed accounting with accuracy. 

Table of Contents

• What are outstanding expenses?
• Significance
• Examples of Outstanding Expenses
• Representation

What are outstanding expenses?

Outstanding expenses are due but not yet paid on due date and become outstanding to the company but the related payment has not been made simultaneously. Payments are not always received or paid when due in business and trade. These expenses come under current liability in the balance sheet. Outstanding expenses have been incurred in the current account period. These are due to be paid but their payment is not made. Such personal account expenses are treated as a liability for any business. 

Let us understand more about outstanding expenses in detail.

Significance

• Accuracy in Financial Statements: Outstanding expenses ensure that the financial statements reflect the true and fair view of a company’s financial position. By accounting for expenses that have been incurred but not yet paid, the profit and loss statement provides a more accurate representation of expenses for a given period.
• Compliance with Accrual Accounting: Recognizing outstanding expenses is in line with the accrual basis of accounting, where expenses are recorded when they are incurred, not when they are paid.
• Cash Flow Management: By recognizing outstanding expenses, businesses can better manage their cash flows. They can plan for future payments and ensure that sufficient funds are available when the payment is due.
• Tax Implications: Recognizing outstanding expenses can have tax implications. By accounting for all expenses incurred within a financial year, businesses might reduce their taxable income for that year.
• Budgeting and Forecasting: Recognizing outstanding expenses helps in better budgeting and forecasting. Businesses can anticipate future cash outflows and plan accordingly.
• Stakeholder Confidence: Transparently recognizing and reporting outstanding expenses can enhance stakeholder confidence. It assures investors, creditors, and other stakeholders that the company is managing its finances responsibly and is aware of all its liabilities.
• Decision Making: For management, understanding the total liabilities, including outstanding expenses, is crucial for decision-making. It provides a clearer picture of the company’s financial obligations.

Examples of Outstanding Expenses

The following table indicates examples of outstanding expenses:

Expense	Use
Rent Outstanding	Let us say a company rents office space for $5,000 per month, payable at the end of each month. If the company hasn’t paid December’s rent by the end of December, that $5,000 becomes an outstanding expense.
Salaries and Wages Outstanding	Assume a company pays its employees on 5th of every month for the previous month’s work. The salaries for December, which will be paid in January, are considered outstanding expenses for December.
Utilities Outstanding	If a company receives its electricity bill for December in January and pays it in February, the amount of the December bill is an outstanding expense for December.
Interest Outstanding	A company might have taken a loan on which interest accrues monthly but is payable quarterly. The interest for the first two months of a quarter would be outstanding at the end of each of those months.
Commission Outstanding	A business might owe commission to its salespeople based on sales made in a particular month, payable in the subsequent month. The commission owed for December, which is paid in January, is an outstanding expense for December.
Insurance Outstanding	If a company pays its insurance premiums quarterly or annually, the portion of the premium that relates to the period not yet paid for is considered an outstanding expense.
Taxes Outstanding	Taxes, whether income tax, property tax, or other types, might be accrued during a period but not payable until a future date. The accrued amount that hasn’t been paid by the end of the period is an outstanding expense.
Internet Bills Outstanding	Similar to utilities, if a company receives its telephone or internet bill for a particular month in the subsequent month and pays it later, the amount of the bill is an outstanding expense for the month it pertains to.
Repairs and Maintenance Outstanding	If a company gets some repair work done in December but the repair agency sends the bill in January, which is paid in February, the repair charges become an outstanding expense for December.
Membership Fees Outstanding	If a company subscribes to certain journals, magazines, or memberships and hasn’t paid the subscription or membership fee by the end of the period, it’s considered an outstanding expense

Representation of Outstanding Expenses

These are the accrued expenses that represent the amount that a company owes but is not yet paid. These are represented on the liabilities side of the balance sheet. They are due within the period of one year. 

Such expenses are due within the period of one year. It can be grouped together with other liabilities such as accrued liabilities or other payables. 

Total amount of all amounting expenses are shown next to the line item. It represents total expenses incurred yet not paid by the end of an accounting period.

Here is a representation of outstanding expenses in journal entries.

Expense A/C	Debit	Debit the increase in expense
Outstanding Expense A/C	Credit	Credit the increase in liability

Such expenses are obligations for business and are treated as liability. Here, the modern rules of accounting which is; “credit the increase in liability” and “debit the increase in expense” is applied. 

As in terms of financial statements, they are included into different subheads. For income statements, they are added to respective expense accounts. In the case for the balance sheet, they are shown under the head “current liabilities“.

Relationship between Nominal Account and Outstanding Expenses

While nominal accounts help in determining the profit or loss for a period by recording all incomes and expenses, outstanding expenses ensure that the financial statements reflect all liabilities and that expenses are recorded in the correct period.

1. Accrual Basis: Both concepts adhere to accrual basis of accounting, wherein both income and expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid.
2. Recording: When an expense becomes outstanding, it is recorded in its respective nominal account. For example, if salaries for December remain unpaid, the Salaries Account (a nominal account) is debited, and Outstanding Salaries Account is credited.
3. Financial Statements: Outstanding expenses, being liabilities, appear on the balance sheet. The corresponding nominal account (like Salaries, Rent, etc.) reflects the total expense, including the outstanding amount, in the Profit and Loss Account.

Difference Between Prepaid Expenses and Outstanding Expenses

The following table showcases the difference between prepaid and outstanding expenses

Parameter	Prepaid Expenses	Outstanding Expenses
Definition	Expenses paid in advance for a service or benefit.	Expenses incurred but not paid by the end of the period.
Nature	Asset (Future benefit)	Liability (Obligation to pay)
Financial Statement Presentation	Assets side of the Balance Sheet	Liabilities side of the Balance Sheet
Payment Status	Amount has been paid in advance.	Amount is yet to be paid.
Examples	Prepaid rent, prepaid insurance, and prepaid subscriptions.	Outstanding salaries, outstanding rent, outstanding bills.
Accounting Treatment	Deducted from the respective expense in the Profit & Loss.	Added to the respective expense in the Profit & Loss.
Duration	Benefits availed in the future (next accounting year).	Payment made in the immediate next period.