Every business firm would like to know the actual position of its affairs for a particular financial year. At the end of financial year when the balance sheet and profit and loss account are prepared, it generally happens that all the expenses relating to that particular financial year are not booked. The reason is very simple that the expenditures are not paid till the financial year. It means that these expenses are not considered while preparing the final accounts. Thus, the actual position of the firm is not revealed. To know the right position of the company it is compulsory that all expenses relating to that financial year must be booked whether paid or unpaid. When we make the provisions for expenses then we call them as expenses payable or outstanding expenses.
For example a company is preparing the final accounts for the financial year from April’2015 to March’2016 and the salary for the month of March’2016 is paid in April’2016 i.e. in next financial year. The salary for the month of March must be shown in financial year 2016-17 itself to show the true picture of the profit or loss of the company. In this case the salary for the month of March’16 will be called as outstanding expenses for financial year 2015-16.
Treatment of Outstanding Expenses in Final Accounts
The outstanding expenses are added in to the respective expenses in profit & loss account and the same amount is shown in balance sheet in liabilities side as expenses payable or outstanding expenses.
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