A business can show ₹80,000 as expenses in its records, but that does not always mean ₹80,000 has actually been paid. Suppose electricity for March is ₹6,000, but the bill will be paid in April. If you record only what was paid, March's profit will look higher than it should.
This is exactly where outstanding expenses matter. The expense belongs to the current accounting period even though the payment has not yet been made. So, where does that unpaid amount go? The answer becomes clear once we separate the expense from the payment.
What are Outstanding Expenses?
Outstanding expenses are expenses that have been incurred during the current accounting period but have not yet been paid. They are treated as an expense in the Profit and Loss Account and shown as a current liability in the Balance Sheet until they are paid.
For example, if salaries of ₹20,000 relating to March remain unpaid at year-end, ₹20,000 is an outstanding expense. It must be included in the current year's salary expense because the employees have already provided their services.
Outstanding Expenses Explained Simply
Think of an outstanding expense as a bill that belongs to today but will be paid tomorrow.
The accounting question is not simply, "Did the business pay the money?" The better question is, "Did the business incur the expense during this accounting period?"
This distinction comes from the accrual basis of accounting. Under this approach, expenses are recognised in the period to which they relate, whether or not cash has been paid.
Suppose a business has recorded salary paid of ₹1,00,000 during the year. At year-end, it discovers that another ₹10,000 salary is still payable for work already performed.
The actual salary expense for the year is therefore:
Salary Expense = Salary Paid + Outstanding Salary
= ₹1,00,000 + ₹10,000
= ₹1,10,000
The additional ₹10,000 increases the expense in the Profit and Loss Account. Because the business has not yet paid this amount, it also creates a liability of ₹10,000 in the Balance Sheet.
This is the part beginners sometimes miss: one adjustment affects two financial statements.
Why does profit decrease?
Because the business has consumed the service or incurred the cost, even though cash has not left the bank account yet.
Why does the Balance Sheet show a liability?
Because the business now owes that amount to another party.
A useful way to remember the logic is:
Expense incurred → Profit decreases
Expense unpaid → Liability increases
For example, if rent of ₹15,000 for March is unpaid at year-end, the business cannot simply ignore it because the landlord has not received the money. The business has already used the premises during March. Therefore, the expense belongs to March.
A professional looking at the accounts would also ask whether the unpaid amount relates entirely to the current accounting period, whether it has already been recorded, and whether any portion belongs to a future period. That period-based thinking prevents many year-end adjustment errors.
Key Rules of Outstanding Expenses
The basic accounting treatment can be remembered through these rules:
· Outstanding expenses are added to the related expense in the Profit and Loss Account.
· They reduce the current year's profit.
· The outstanding amount is shown as a current liability in the Balance Sheet.
· The expense is recognised in the period in which it is incurred, not merely when it is paid.
· When the outstanding amount is subsequently paid, the liability is settled.
Accounting Entry
When an expense becomes outstanding:
Expense A/c Dr.
To Outstanding Expense A/c
For example:
Salary A/c Dr. ₹10,000
To Outstanding Salary A/c ₹10,000
The debit increases the salary expense, while the credit records the amount payable.
Outstanding Expenses Solved Example
Imagine Manika Traders has paid ₹90,000 as salaries during the financial year. At 31 March, salary of ₹10,000 for March is still unpaid.
Step 1: Identify the total expense
The ₹10,000 relates to services received during the current year, so it is a current-year expense.
Total Salary Expense = ₹90,000 + ₹10,000 = ₹1,00,000
Step 2: Effect on Profit and Loss Account
Salary expense will be shown as ₹1,00,000, not ₹90,000.
The additional ₹10,000 reduces profit because it is an expense of the current accounting period.
Step 3: Effect on Balance Sheet
The ₹10,000 has not yet been paid.
Therefore, the business owes ₹10,000 and must show it as a current liability.
Step 4: Think about what actually happened
The business received the employees' services worth ₹1,00,000 during the year, but paid only ₹90,000.
So:
Expense recognised = ₹1,00,000
Cash paid = ₹90,000
Amount still payable = ₹10,000
This is why the Profit and Loss Account and Balance Sheet show different aspects of the same adjustment.
Common Mistakes to Avoid
Wrong: "If the expense has not been paid, it should not be recorded."
Right: An outstanding expense is recorded because it has already been incurred. Payment timing does not decide the accounting period.
Wrong: "Outstanding expenses are shown only in the Profit and Loss Account."
Right: The expense affects the Profit and Loss Account, while the unpaid amount is also shown as a liability in the Balance Sheet. Forgetting either side creates an incomplete adjustment.
How to Think About Outstanding Expenses in Real Life
Imagine you run a small coaching centre. At the end of March, teachers have earned ₹50,000 for classes already conducted, but ₹8,000 will be paid in April.
Would it make sense to say that the coaching centre incurred only ₹42,000 of teaching expense simply because that is what was paid?
No.
The service has already been received. The ₹8,000 is therefore part of March's expense and becomes an amount payable.
This is a useful professional habit: first determine the period to which the cost belongs; then determine whether it has been paid. Don't reverse that order.
Exam Tip
When an adjustment question gives an expense along with an outstanding amount, remember the standard treatment: add the outstanding amount to the expense in the Profit and Loss Account and show the same amount as a liability in the Balance Sheet.
A common exam mistake is to add the amount to the expense but forget the Balance Sheet liability.
Quick Recap
· Outstanding expenses are incurred but unpaid expenses.
· They are added to the related expense in the Profit and Loss Account.
· They reduce current-year profit.
· The unpaid amount is shown as a current liability.
· The basic entry is Expense A/c Dr. To Outstanding Expense A/c.
· Accounting focuses on when the expense is incurred, not simply when cash is paid.
Frequently Asked Questions
Q: What are outstanding expenses?
A: Outstanding expenses are expenses incurred during an
accounting period but not yet paid. They are recognised as expenses in the
Profit and Loss Account and shown as liabilities in the Balance Sheet because
the business still has an obligation to pay them.
Q: How do outstanding expenses affect the Profit and Loss Account?
A: Outstanding expenses are added to the related expense
already recorded. This increases total expenses for the accounting period and
therefore reduces the business's profit or increases its loss.
Q: How do outstanding expenses affect the Balance Sheet?
A: Outstanding expenses are shown as liabilities because the
business owes the unpaid amount. They are generally presented under current
liabilities when the amount is expected to be settled in the normal operating
cycle or within the relevant short-term period.
Q: Why are outstanding expenses added to expenses?
A: They are added because the expense has already been
incurred during the accounting period. Under accrual accounting, the expense is
recognised in the period in which the related benefit or service is received,
regardless of when payment is made.
Q: Is an outstanding expense an asset or a liability?
A: An outstanding expense is a liability, not an asset. The
business has already incurred the expense but still owes the amount to the
concerned party. Therefore, the unpaid amount represents an obligation that
appears on the Balance Sheet.
Related Terms
→ Accrued Expenses
→ Prepaid Expenses
→ Accrued Income
→ Income Received in Advance
→ Adjusting Entries
Related Guides
→ How do prepaid expenses affect the Profit and Loss Account and Balance Sheet?
An outstanding expense is a simple reminder of a bigger accounting principle: profit follows the period in which value is consumed, not merely the movement of cash.
Hi, I'm Manoj Kumar — MBA, with hands-on experience in accounting, taxation, and business concepts. Most students don't struggle with commerce itself; they struggle because no one breaks it down properly. That's what I focus on with Learn with Manika: simple, logical steps that make concepts stick, whether you're prepping for exams or just want to understand how things actually work.
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