Adjustment of Outstanding Expenses in Final Accounts (Financial Statements)

Outstanding expenses refer to those expenses which relate to the current accounting period but have not been paid so far. These expenses lead to an increase in liability for a firm. Some of the types of these expenses are Outstanding wages, Outstanding salaries, Outstanding Interest on loan, etc. All these expenses have to be taken into account for computing the current Profit/Loss of a firm. These are debited to Profit and Loss A/c under their respective accounts.

Adjustment:

A. If Outstanding Expense is given outside the trial balance: In such case, two entries will be passed:

• Will be added in the concerned item (expense) at the Dr. side of Trading A/c or Profit & Loss A/c.
• Will be shown on the liabilities side of the balance sheet.

B. If Outstanding Expense is given inside the trial balance: It will be only shown on the liabilities side of the Balance Sheet. (Because it is a Representative Personal A/c, which has a Cr. balance)

Illustration:

The Trial Balance of Ms. Samriti for the year ended March 31 2023, appears as follows:

The following adjustments were noted on that date:

1. Outstanding wages amounting to ₹500.

2. Amount of Closing stock on 31st March 2022 was ₹15,000.

3. Salary paid in advance amounting to ₹5,000.

4. Commission amounting to ₹1,500 is still to be received.

5. Rent received in advance amounts to ₹3,000.

Prepare Trading and Profit and Loss A/c and balance sheet after taking the following adjustments into consideration.

Solution: