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Q3. Write short notes on :


a.    Outstanding Expenses
Expenses due but not yet paid are known as outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in following month. If the final accounts are prepare for the year ending 31st march. Then the expenses payable in March will be paid in April of next accounting year. The extent to which the expenses belong to the current year but payable in the next accounting year is called Outstanding Expenses.

At the end of the accounting period, there may be expenses which have become due but have not yet been paid. If the organisation is following the mercantile system of accounting, these expenses are to be brought into account.
Accounting Treatment of outstanding expenses
Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Date
V/R
No.
Particulars
L/F
Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th
Expenditure a/c 
      To Expenditure Outstanding a/c
Dr

xxx

xxx
[For the amount expenditure relating to the current period, not yet paid brought in to the books.]

Adjustment

The amount of expenditure outstanding is to be
  1. Added to the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
  2. Shown as a liability on the liabilities side of the balance sheet.
b. Prepaid Expenses
A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future.An example of expensing prepaid expenses would be if a company had a one-year insurance policy cost of $1200. As each month elapses, $100 of prepaid insurance would be expensed to the income statement until the account is empty at the end of the year. Advances paid are treated in a different manner from expenses prepaid, the difference being that the advances are recoverable whereas expenditure prepaid are realized by adjusted them in the amounts to be paid in the future towards the expenditure.
Accounting Treatment of Pre-paid expenses
Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Date
V/R
No.
Particulars
L/F
Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th
Expenditure Prepaid a/c
      To Expenditure a/c
Dr

Xxx

xxx
[For the amount expenditure relating to the subsequent periods paid in advance being adjusted from the current period expenditure.]
Adjustment
The amount of expenditure prepaid is to be
  1. Deducted from the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
  2. Shown as an asset on the assets side of the balance sheet.


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