Question

Explain Prepaid and outstanding Expenses with example​

Answer 1

Answer:

the normal course of business, some of the expenses may be paid in advance. However, the organization may not receive the benefits from these expenses by the end of the current accounting year. We call these expenses as prepaid expenses. We treat them as current assets.

The Journal entry to record prepaid expenses is:

Date Particulars Amount (Dr.) Amount (Cr.)

Prepaid Expense A/c Dr.

To Expense A/c

(Being prepaid expense recorded)

The Prepaid Expense A/c appears on the assets side of the Balance Sheet. While preparing the Trading and Profit and Loss A/c we need to deduct the amount of prepaid expense from that particular expense.

Accrued income, Advance income and Prepaid expenses

Accrued Income

It may so happen that we may earn some incomes during the current accounting year but not receive them in the same year. Such income is accrued income.

Thus, these incomes pertain to the current accounting year. Therefore, we need to record them as current year’s incomes.

The Journal entry to record accrued incomes is:

Date Particulars Amount (Dr.) Amount (Cr.)

Accrued Income A/c Dr.

To Income A/c

(Being recording of accrued incomes)

The Accrued Income A/c appears on the assets side of the Balance Sheet. While preparing the Trading and Profit and Loss A/c we need to add the amount of accrued income to that particular income.

Income Received in Advance

In the ordinary course of a business, it may receive some incomes in advance in spite of not rendering the services. Such incomes are incomes received in advance.

Thus, these are not pertaining to the current accounting year. Therefore, these are current liabilities.

Answer 2

Answer:

Prepaid expenses are future expenses that are paid in advance. Example - Rent for April 2020 paid in financial year 19-20.

Outstanding expenses are those expenses which have been incurred during the current accounting period and are due to be paid, however, the payment is not made. Example - Rent for March 2020 not paid in financial year 19-20.