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.

• Debit - Expenditure a/c

  Expenditure a/c is a nominal account with a debit balance. The balance in the Expenditure a/c generally indicates the total amount paid on account of the expenditure during the current accounting period.

  To bring the expenditure that has not yet been brought into account into the books, the relevant expenditure account has to be debited.

  Salaries a/c ↓ expense ↓ Nominal a/c ↓ Debit [Debit all Expenses and Losses]

• Credit - Expenses Outstanding a/c

  The amount of expenditure that has not yet been paid is a liability for the organisation. The persons to whom the organisation owes is its creditor. As such, the amount of expenditure outstanding that has not yet been taken into the books is credited to the Expenditure Outstanding a/c.

  Outstanding Salaries a/c ↓ liability/creditor ↓ Personal a/c ↓ Credit [Credit the benefit giver]

  Expenses Outstanding a/c is a personal account with a credit balance. The balance indicates the amount that is owed by the organisation on account of unpaid expenditure.
  Nominal accounts prefixed or suffixed with the terms outstanding, prepaid, pre received etc. are personal accounts.

Journal

Particulars
Expenditure a/c To Expenditure Outstanding a/c	Dr
[For the amount expenditure incurred and not yet paid brought in to books]

Illustration - Explanation

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Outstanding a/c	– –	– –	13,500

Expenditure a/c is not present in the opening trial balance. It being a nominal account is created anew in every accounting period. Even if assumed to be present on account of having been created in the current accounting period and the trial balance being drawn after having created the nominal accounts required, it has no balance.

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Outstanding	– – –	– 0 –	13,500

Following is the summary of the transactions relating to the expenditure that have taken place during the current accounting period.

Cash to the extent of 49,500 has been paid for the current period expense and 9,000 towards the previous periods dues. An amount of 4,500 for the current period is still outstanding at the end of the accounting period and has not been brought into books.

The outstanding expenditure can be handled in three different ways based on the information that the organisation intends to derive and maintain with regard to it.

• Expenditure Outstanding a/c giving information relating to expenditure outstanding available at all times.
• Expenditure Outstanding a/c available only for the purpose of final accounting.
• Expenditure a/c itself provides the information relating to outstanding expenditure.

Expenditure Outstanding a/c is treated as a distinct liability and would provide the information relating to the outstanding expenditure all through out the accounting period.

Recording dues

Dues may be recorded at any time during the accounting period as and when the expenditure is considered to become outstanding.

Journal

Date	Particulars		Amount (Dr)	Amount (Cr)
–	Expenditure a/c To Expenditure Outstanding a/c	Dr	–	–
	[For the expenditure outstanding]

Recording outstandings is dependent on the conventions followed in the organisations. Some record the dues only towards the end of the accounting period. Some record them only if they are outstanding for a substantial period of time.

Some record them for every outstanding immediately on the amounts falling due. Say for example many organisations record a due for some common expenditures like salaries and then pay them off, so that even if there is a slight delay in payment that would be visible in the form of the outstanding expenditure a/c balance.

Payments

Payments may be made towards the current period expenditure or for clearing the dues. Amounts paid towards the dues are considered to be payment for clearing the liability, Expenditure Outstanding.

Journal

Date	Particulars		Amount (Dr)	Amount (Cr)
–	Expenditure a/c To Cash/Bank a/c	Dr	–	–
	[For the amount paid towards the expenditure]
–	Expenditure Outstanding a/c To Cash/Bank a/c	Dr	–	–
	[For the amount paid towards the previous period dues.]

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– –	To Cash To Expenditure Outstanding To Bank	– – – –	30/06/_6	By balance c/d	49,500
		49,500			49,500
30/06/_6	To Balance b/d	49,500

Expenditure Outstanding a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – 30/06/_6	To Cash To Bank To Balance c/d	– – 4,500	01/07/_5	By Balance b/d By Expenditure	13,500 –
		–			–
			01/07/_6	By balance b/d	4,500

Trial Balance of M/s ___ as on 30^th June 20_6

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Outstanding	– –	49,500	4,500

Outstanding Expenses at the end of the accounting period

• Accounting

  The outstanding expenditure for the current period not yet brought in has to be brought into the books of accounts.

  Journal

  Particulars		Amount (Dr)	Amount (Cr)
  Expenditure a/c To Expenditure Outstanding a/c	Dr	4,500	4,500
  [For the amount expenditure relating to the current period, not yet paid brought in to the books.]

  Posting, rebalancing and closing the expenditure account (assuming it to be indirect expenditure)

  Expenditure a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  30/06/_6 30/06/_6	To Balance b/d To Expenditure Outstanding	49,500 4,500	30/06/_6	By P/L a/c	54,000
  		54,000			54,000

  Expenditure Outstanding a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  30/06/_6	To Balance c/d	9,000	30/06/_6 30/06/_6	By Balance b/d By Expenditure	4,500 4,500
  		9,000			9,000
  			01/07/_6	By balance b/d	9,000

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To Expenditure	54,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Assets	Amount
  Expenditure Outstanding	9,000

• Adjustment

  Working notes for adjustments

  Net Entry	Adjustment	Side	Where
  Dr. Expenditure a/c Cr. Outstanding Expenditure a/c	1. (+/✔) to/as Expenditure 2. (+/✔) to/as Outstanding Expenditure	Debit Liabilities	Trdg or P/L B/S

  Read as

  1. Add to the relevant expenditure on the debit side of the Trading a/c or the Profit and Loss a/c as the case may be.
  2. Add/Show to/as the relevant outstanding expenditure on the liabilities side of the balance sheet.

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Amount	Particulars	Amount	Amount
  To Expenditure (+) Unrecorded	49,500 4,500	54,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Amount	Assets	Amount	Amount
  Expenditure Outstanding (+) Unrecorded	4,500 4,500	9,000

Where the organisation does not intend to maintain the information relating to outstanding expenses distinctly from the information relating to the current period expenses, the Expenditure Outstanding a/c is created at the end of the accounting period and is written off by transfer to the Expenditure a/c at the beginning of the subsequent accounting period.

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Outstanding	– – –	– 0 –	13,500

Expenditure Outstanding a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/07/_5	To Expenditure a/c	13,500	01/07/_5	By Balance b/d	13,500
		13,500			13,500

Recording dues

No dues are recorded during the course of the accounting period. At the end of the accounting period, the total due, whether it be for the current accounting period or the prior accounting periods is recorded as outstanding expenditure for the purpose of preparation of final accounts.

Payments

The amounts paid during the current period, whether towards the current period dues or the previous period dues are considered to be expenditure paid and Expenditure a/c is considered to be the account that is affected on account of the payment. Expenditure Outstanding a/c is not used within the accounting period.

Journal

Date	Particulars		Amount (Dr)	Amount (Cr)
–	Expenditure a/c To Cash/Bank a/c	Dr	–	–
	[For the amount paid towards the expenditure]

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– –	To Cash To Bank	– – –	01/07/_5 30/06/_6	By Expenditure Outstanding By Balance c/d	13,500 45,000
		58,500			58,500
30/06/_6	To balance b/d	45,000

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Outstanding	– – –	– 45,000 –	0

The Expenditure Outstanding a/c does not carry any balance till the total outstanding at the end of the current accounting period is recorded.

Outstanding Expenses at the end of the accounting period

• Accounting

  The total outstanding expenditure at the end of the accounting period including the past dues has to be brought into the books of accounts.

  Journal

  Particulars		Amount (Dr)	Amount (Cr)
  Expenditure a/c To Expenditure Outstanding a/c	Dr	9,000	9,000
  [For the total outstanding expenditure brought into books]

  Posting, rebalancing and closing the expenditure account (assuming it to be indirect expenditure)

  Expenditure a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  30/06/_6 30/06/_6	To Balance b/d To Expenditure Outstanding	45,000 9,000	30/06/_6	By P/L a/c	54,000
  		54,000			54,000

  Expenditure Outstanding a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  01/07/_5 30/06/_6	To Expenditure To Balance c/d	13,500 9,000	01/07/_5 30/06/_6	By Balance b/d By Expenditure	13,500 9,000
  		9,000			9,000
  			01/07/_6	By Balance b/d	9,000

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To Expenditure	54,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Assets	Amount
  Expenditure Outstanding	9,000

• Adjustment

  Working notes for adjustments

  Net Entry	Adjustment	Side	Where
  Dr. Expenditure a/c Cr. Outstanding Expenditure a/c	1. (+/✔) to/as Expenditure 2. (+/✔) to/as Outstanding Expenditure	Debit Liabilities	Trdg or P/L B/S

  Read as

  1. Add to the relevant expenditure on the debit side of the Trading a/c or the Profit and Loss a/c as the case may be.
  2. Add/Show to/as the relevant outstanding expenditure on the liabilities side of the balance sheet.

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Amount	Particulars	Amount	Amount
  To Expenditure (+) Unrecorded	45,000 9,000	54,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Amount	Assets	Amount	Amount
  Expenditure Outstanding (+) Unrecorded	0 9,000	9,000

  The Expenditure Outstanding a/c is created at the beginning of the accounting period through the opening entry. The total opening balance is transferred to the relevant Expenditure a/c thus making its balance zero. While showing the adjustment in the closing balance sheet we may consider the account to be in existence with a zero balance. Thus the outstanding brought into books at the end is shown as added to zero. This is not a requirement, though.

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Amount	Assets	Amount	Amount
  Expenditure Outstanding		9,000

Under this method, no Expenditure Outstanding a/c is present in the books of accounts. The outstanding expenditure is carried forward as a balance in the Expenditure a/c itself, thereby treating the Expenditure a/c as a personal account for the purpose of making up the balance sheet at the end of the accounting period. All other times and for all other purposes Expenditure account is treated as a nominal account.

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure	– –	– –	13,500

The Expenditure a/c in the opening balance sheet represents a personal account. The opening credit balance in the account represents outstanding expenditure pertaining to the previous periods.

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – – 30/06/_6	To Cash To Bank – To Balance c/d (?)	– – – 9,000	01/07/_5 30/06/_6	By Balance b/d By P/L a/c	13,500 54,000
		67,500			67,500
			01/07/_6	By Balance b/d	9,000

Due raised

There is no due recorded either during the course of the accounting period or at the end of the accounting period.

At the end of the accounting period, the current period expenditure is transferred to the Trading a/c or the Profit and Loss a/c as the case may be, leaving the outstanding expenditure as a credit balance in the account.

Payments

All payments made during the current period are considered to have been paid for the expenditure without making any distinction as to the current period dues and prior period dues and Expenditure a/c is considered to be the account that is affected on account of the payment.

Chargeable expense as balancing figure

A credit balance equal to the total amount outstanding at the end of the accounting period, whether it be towards the current period dues or prior period dues, is carried forward to the subsequent accounting period. The balancing figure after carrying forward the balance, would be the expenditure chargeable to the Trading a/c or the Profit and Loss a/c as the case may be.

This approach is less practical as it requires us to pass the closing entry to create a support for the closing balance and that would be possible only after all the accounting is complete.

Trading and Profit & Loss a/c

DrCr
Particulars	Amount	Particulars	Amount
To Expenditure	54,000

Balance Sheet of M/s ______ as on 30^th June 20_6

Liabilities	Amount	Assets	Amount
Expenditure	9,000

This has the same effect as the method where Outstanding Expenditure a/c is maintained only for the purposes of the balance sheet. The only difference being that the Expenditure a/c appears in place of Outstanding Expenditure a/c in the balance sheet.

Ledger accounts generally representing or understood as Nominal accounts appearing in the Balance sheet should be considered personal accounts. They would be an equivalent of a debtor if they appear on the assets side or a creditor if they appear on the liabilities side.

Outstanding Expenses at the end of the accounting period

Once the current period expenditure is transferred to the Trading a/c or the Profit and Loss a/c as the case may be, the expenditure account would show a credit balance equal to the outstanding expenditure if at all there is any.

No entries need to be passed and no adjustments need to be made.

At the end of the accounting period, there may be expenses which are not yet due but have been paid i.e. paid in advance. If the organisation is following the mercantile system of accounting, these prepaid expenses are to be carried over to the subsequent accounting periods to which they relate.

• Credit - Expenditure a/c

  Expenditure a/c is a nominal account with a debit balance. The balance in the Expenditure a/c generally indicates the total amount paid on account of the expenditure during the current accounting period.

  The payments made towards the expenditure indicated by the expenditure account balance include prepaid expenditure. This prepaid expenditure has to be deducted from the expenditure a/c balance to ascertain the actual expenditure chargeable for the current period.

  Expenditure a/c shows a debit balance. Deducting from the Expenditure a/c or reducing the Expenditure a/c balance requires us to credit the Expenditure a/c.

  Salaries a/c ↓ expense ↓ Nominal a/c ↓ Debit Credit [Debit all Expenses and Losses] Reverse

• Debit - Expenses Prepaid a/c

  The prepaid expenditure is an amount that is owed to the organisation by the person or organisation to whom it has been prepaid. The persons who owe the organisation are its debtors. As such, the amount of expenditure prepaid that has not yet been recorded in the books is debited to the Expenditure Prepaid a/c.

  Prepaid Salaries a/c ↓ Debtor/Asset ↓ Personal a/c ↓ Debit [Debit the benefit receiver]

  Expenses Prepaid a/c is a personal account with a debit balance. The balance indicates the amount that is owed to the organisation.
  Nominal accounts prefixed or suffixed with the terms outstanding, prepaid, pre received etc. are personal accounts.

Journal

Particulars
Expenditure Prepaid a/c To Expenditure a/c	Dr
[For the amount expenditure prepaid brought in to books]

Prepaid expenditure is an asset to be consumed or absorbed as expenditure and not realised

Prepaid Expenditure a/c is a personal account and an equivalent of a debtor.

Outstanding Expenditure a/c is a personal account and an equivalent of a creditor. It is cleared by repaying the due indicated by the account. It is a liability liquidated by payment.

Prepaid Expenditure a/c is not an asset that can be realised. It is not cleared by collecting the due indicated by the account. It is used up or absorbed as expenditure by transferring it to the relevant expenditure account in the accounting period relevant to it.

Prepaid expenditure is distinct from Advance

Prepaid expenditure should be considered and understood as being distinct from Advances. The fundamental difference being, whereas advances are recollected, prepaid expenses are absorbed as expenditure.

Illustration - Explanation

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Prepaid a/c	– –	– 8,000 –

Expenditure a/c is not present in the opening trial balance. It being a nominal account is created anew in every accounting period. Even if assumed to be present on account of having been created in the current accounting period and the trial balance being drawn after having created the nominal accounts required, it has no balance.

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Prepaid	– – –	– 0 8,000

Following is the summary of the transactions relating to the expenditure that have taken place during the current accounting period.

Cash paid towards the expenditure during the accounting period includes an amount of 6,000 prepaid which has not been adjusted for prepaids by the end of the accounting period.

The prepaid expenditure can be handled in three different ways based on the information that the organisation intends to derive and maintain with regard to it.

• Expenditure Prepaid a/c giving information relating to expenditure prepaid available at all times.
• Expenditure Prepaid a/c available only for the purpose of final accounting.
• Expenditure a/c itself provides the information relating to prepaid expenditure.

Expenditure Prepaid a/c is treated as a distinct asset and would provide the information relating to the prepaid expenditure all through out the accounting period. Amounts from the Expenditure prepaid a/c are absorbed as expenditure by transfer to the Expenditure a/c relevant to the accounting period for which the Expenditure has been prepaid.

Thus the Expenditure Prepaid a/c balance at the beginning of the accounting period, which represents the expenditure prepaid during the prior accounting period would get absorbed as expenditure within a short time after the start of the accounting period, unless the Expenditure Prepaid relates to a prepayment that would relate to a time period far away.

Recording prepaids

Prepaid expenses may be recorded at any time during the accounting period as and when the expenditure is considered to have been prepaid.

They may be recorded directly as prepaid at the time of being paid or by transfer from the expenditure a/c if they have already been recorded as expenditure at the time of payment.

Journal

Date	Particulars		Amount (Dr)	Amount (Cr)
–	Expenditure Prepaid a/c To Cash a/c	Dr	–	–
	[For the expenditure prepaid]
–	Expenditure Prepaid a/c To Expenditure a/c	Dr	–	–
	[For the expenditure prepaid earlier recorded as expenditure]

Recording prepaids is dependent on the conventions followed in the organisations. Some record the prepaids only towards the end of the accounting period. Some record them only if they are prepaid before a substantial period of time.

Some record them for every prepaid immediately on the amounts being prepaid.

Consumption/Absorption

Prepaid expenses are absorbed as expenditure by transferring to the expenditure account the amount that is to be treated as an expenditure in the period when it is to be so treated.

Journal

Date	Particulars		Amount (Dr)	Amount (Cr)
–	Expenditure a/c To Expenditure Prepaid a/c	Dr	–	–
	[For the expenditure becoming due and being adjusted by transfer from the prepaid expenditure]

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– –	To Cash To Expenditure Prepaid To Bank	– 5,500 – –	30/06/_6	By balance c/d	82,000
		82,000			82,000
30/06/_6	To Balance b/d	82,000

Expenditure Prepaid a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/07/_5 –	To Balance b/d To Cash	8,000 –	– 30/06/_6	By Expenditure By Balance c/d	5,500 – 2,500
		–			–
01/07/_6	To balance b/d	2,500

Trial Balance of M/s ___ as on 30^th June 20_6

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Prepaid	– –	82,000 2,500

Prepaid Expenses at the end of the accounting period

• Accounting

  The prepaid expenditure at the end of the current accounting period which is not recorded as prepaid has to be brought into the books of accounts.

  Journal

  Particulars		Amount (Dr)	Amount (Cr)
  Expenditure Prepaid a/c To Expenditure a/c	Dr	6,000	6,000
  [For the amount expenditure prepaid brought in to the books.]

  Posting, rebalancing and closing the expenditure account (assuming it to be indirect expenditure)

  Expenditure a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  30/06/_6	To Balance b/d	82,000	30/06/_6 30/06/_6	By Expenditure Prepaid By P/L a/c	6,000 76,000
  		82,000			82,000

  Expenditure Prepaid a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  30/06/_6	To Balance b/d To Expenditure	2,500 6,000	30/06/_6	By Balance c/d	8,500
  		8,500			8,500
  01/07/_6	To Balance b/d	8,500

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To Expenditure	76,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Assets	Amount
  		Expenditure Prepaid	8,500

• Adjustment

  Working notes for adjustments

  Net Entry	Adjustment	Side	Where
  Dr. Expenditure Prepaid a/c Cr. Expenditure a/c	1. (+/✔) to/as Prepaid Expenditure 2. (−) from Expenditure	Assets Debit	B/S Trdg or P/L

  Read as

  1. Add/Show to/as the relevant prepaid expenditure on the assets side of the balance sheet.
  2. Deduct from the relevant expenditure on the debit side of the Trading a/c or the Profit and Loss a/c as the case may be.

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Amount	Particulars	Amount	Amount
  To Expenditure (−) Prepaid	82,000 6,000	76,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Amount	Assets	Amount	Amount
  			Expenditure Prepaid (+) Unrecorded	2,500 6,000	8,500

Where the organisation does not intend to maintain the information relating to prepaid expenses distinctly from the information relating to the current period expenses, the Expenditure Prepaid a/c is created at the end of the accounting period and is written off by transfer to the Expenditure a/c at the beginning of the subsequent accounting period.

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Prepaid	– – –	– 0 8,000

Expenditure Prepaid a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/07/_5	To Balance b/d	8,000	01/07/_5	By Expenditure a/c	8,000
		8,000			8,000

Recording Prepayments

No prepayments are recorded during the course of the accounting period. At the end of the accounting period, the total prepayments which are not yet absorbed as expenditure, whether they have been made during the current accounting period or the prior accounting periods are recorded as prepaid expenditure for the purpose of preparation of final accounts.

Consumption/Absorption

The amounts paid during the current period, whether towards the current period dues or as prepayments are considered to be expenditure paid and Expenditure a/c is considered to be the account that is affected on account of the payment. Expenditure Prepaid a/c is not used within the accounting period.

Journal

Date	Particulars		Amount (Dr)	Amount (Cr)
–	Expenditure a/c To Cash/Bank a/c	Dr	–	–
	[For the amount paid towards the expenditure]

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/07/_5 – –	To Expenditure Prepaid To Cash To Bank	8,000 – –	30/06/_6	By Balance c/d	84,500
		84,500			84,500
30/06/_6	To balance b/d	84,500

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure Expenditure Prepaid	– – –	– 84,500 0

The Expenditure Prepaid a/c does not carry any balance till the total prepaid at the end of the current accounting period is recorded.

Prepaid Expenses at the end of the accounting period

• Accounting

  The total prepaid expenditure at the end of the accounting period including the past prepaids which have not yet been absorbed as expenditure have to be brought into the books of accounts.

  Journal

  Particulars		Amount (Dr)	Amount (Cr)
  Expenditure Prepaid a/c To Expenditure a/c	Dr	8,500	8,500
  [For the total prepaid expenditure brought into books]

  Posting, rebalancing and closing the expenditure account (assuming it to be indirect expenditure)

  Expenditure a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  30/06/_6	To Balance b/d	84,500	30/06/_6	By Expenditure Prepaid By P/L a/c	8,500 76,000
  		84,500			84,500

  Expenditure Prepaid a/c

  DrCr
  Date	Particulars	Amount	Date	Particulars	Amount
  01/07/_5 30/06/_6	To Balance b/d To Expenditure	8,000 8,500	01/07/_5 30/06/_6	By Expenditure By Balance c/d	8,000 8,500
  		16,500			16,500
  01/07/_6	To Balance b/d	8,500

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To Expenditure	76,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Assets	Amount
  		Expenditure Prepaid	8,500

• Adjustment

  Working notes for adjustments

  Net Entry	Adjustment	Side	Where
  Dr. Expenditure Prepaid a/c Cr. Expenditure a/c	1. (+/✔) to/as Expenditure Prepaid 2. (−) from Expenditure	Asset Debit	B/S Trdg or P/L

  Read as

  1. Add/Show to/as the relevant prepaid expenditure on the assets side of the balance sheet.
  2. Deduct from the relevant expenditure on the debit side of the Trading a/c or the Profit and Loss a/c as the case may be.

  Trading and Profit & Loss a/c

  DrCr
  Particulars	Amount	Amount	Particulars	Amount	Amount
  To Expenditure (−) Total Prepaid	84,500 8,500	76,000

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Amount	Assets	Amount	Amount
  			Expenditure Prepaid (+) Unrecorded	0 8,500	8,500

  The Expenditure Prepaid a/c is created at the beginning of the accounting period through the opening entry. The total opening balance is transferred to the relevant Expenditure a/c thus making its balance zero. While showing the adjustment in the closing balance sheet we may consider the account to be in existence with a zero balance. Thus the prepaid brought into books at the end is shown as added to zero. This is not a requirement, though.

  Balance Sheet of M/s ______ as on 30^th June 20_6

  Liabilities	Amount	Amount	Assets	Amount	Amount
  			Expenditure Prepaid		8,500

Under this method, no Expenditure Prepaid a/c is present in the books of accounts. The prepaid expenditure is carried forward as a balance in the Expenditure a/c itself, thereby treating the Expenditure a/c as a personal account for the purpose of making up the balance sheet at the end of the accounting period. All other times and for all other purposes Expenditure account is treated as a nominal account.

Trial Balance of M/s ___ as on 1^st July 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenditure	– –	– –	8,000

The Expenditure a/c in the opening balance sheet represents a personal account. The opening debit balance in the account represents expenditure prepaid during the prior accounting periods and which has not yet been absorbed as expenditure.

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/07/_5 – –	To Balance b/d To Cash To Bank	8,000 – –	30/06/_6	By P/L a/c By Balance c/d (?)	76,000 8,500
		84,500			84,500
01/07/_6	To Balance b/d	8,500

Prepayments recorded

There is no prepayment recorded either during the course of the accounting period or at the end of the accounting period.

At the end of the accounting period, the current period expenditure is transferred to the Trading a/c or the Profit and Loss a/c as the case may be, leaving the prepaid expenditure as a debit balance in the account.

Payments

All payments made during the current period are considered to have been paid for the expenditure without making any distinction as to the current period dues and prepayments and Expenditure a/c is considered to be the account that is affected on account of the payment.

Chargeable expense as balancing figure

A debit balance equal to the total amount prepaid at the end of the accounting period, whether it be towards the current period dues or prepayments, is carried forward to the subsequent accounting period. The balancing figure after carrying forward the balance, would be the expenditure chargeable to the Trading a/c or the Profit and Loss a/c as the case may be.

This approach is less practical as it requires us to pass the closing entry to create a support for the closing balance and that would be possible only after all the accounting is complete.

Trading and Profit & Loss a/c

DrCr
Particulars	Amount	Particulars	Amount
To Expenditure	76,000

Balance Sheet of M/s ______ as on 30^th June 20_6

Liabilities	Amount	Assets	Amount
		Expenditure	8,500

This has the same effect as the method where Prepaid Expenditure a/c is maintained only for the purposes of the balance sheet. The only difference being that the Expenditure a/c appears in place of Prepaid Expenditure a/c in the balance sheet.

Ledger accounts generally representing or understood as Nominal accounts appearing in the Balance sheet should be considered personal accounts. They would be an equivalent of a debtor if they appear on the assets side or a creditor if they appear on the liabilities side.

Prepaid Expenses at the end of the accounting period

Once the current period expenditure is transferred to the Trading a/c or the Profit and Loss a/c as the case may be, the expenditure account would show a debit balance equal to the prepaid expenditure if at all there is any.

No entries need to be passed and no adjustments need to be made.

Theoretically it is possible to make Expenditure a/c represent both prepaid Expenditure and outstanding Expenditure.

Expenditure a/c at the end of the accounting period would hold both a credit balance representing outstanding Expenditure as well as a debit balance representing prepaid Expenditure. This is achieved by including the Expenditure a/c in both the assets (to represent Prepaid Expenditure) and liabilities (to represent Outstanding Expenditure) with the relevant amounts in the closing entry.

Journal [Year end 30/06/_6]

Particulars		Amount (Dr)	Amount (Cr)
Creditors a/c Capital a/c – Expenditure a/c – To Motor Car a/c To Machinery a/c – To Expenditure a/c –	Dr Dr Dr Dr Dr	– – – 6,000 –	– – – 4,500 –
[For the balances carried forward to the next accounting period]

Closing entry is the Journal entry that supports the postings representing balances carried forward at the end of the accounting period. Liabilities are debited and assets are credited. Thus, Expenditure debited would represent the liability Expenditure Outstanding and Expenditure credited would represent the asset Expenditure Prepaid.

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/07/_5 – – 30/06/_6	To Balance b/d To Cash To Bank To Balance c/d	8,000 – – 9,000	01/07/_5 – – 30/06/_6	By Balance b/d By P/L a/c (?) By Balance c/d	13,500 76,000 8,500
		98,000			98,000
01/07/_6	To Balance b/d	8,500	01/07/_6	By Balance b/d	9,000

At the beginning of the accounting period

At the beginning of the accounting period, the Expenditure a/c shows both a debit balance and a credit balance. The journal entry that supports the postings representing opening balances brought down is the Opening entry.

Journal [Year beginning 01/07/_5]

Particulars		Amount (Dr)	Amount (Cr)
Motor Car a/c Machinery a/c – Expenditure a/c – To Creditors a/c To Capital a/c – To Expenditure a/c –	Dr Dr Dr Dr Dr	– – – 8,000 –	– – – 4,300 –
[For the balances brought forward from the previous accounting period]

Opening entry is the Journal entry that supports the postings representing balances brought forward at the beginning of the accounting period. Assets are debited and liabilities are credited. Thus, Expenditure debited would represent the asset Expenditure Prepaid and Expenditure credited would represent the liability Expenditure Outstanding.

Expenditure a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/07/_5	To Balance b/d	8,000	01/07/_5	By Balance b/d	13,500

The problem

Closing entry is so called as it is generally recorded as the last entry at the end of the accounting period. The ledger account balances used in the closing entry are the ones after completing final accounts and making all adjustments at the end of the accounting period. Normally it is no more accounting relating to the current period after recording the closing entry.

To complete final accounting we need the Expenditure a/c balance that is to be charged as expenditure by crediting it to the Trading a/c or the Profit and Loss a/c as the case may be. The Expenditure a/c balance that is charged as expenditure is obtained as the balancing figure in the Expenditure a/c, by posting both the debit and credit carry forward balances. These postings being supported by the closing entry require the closing entry to have been completed.

Unless the closing entry has been recorded, the Expenditure a/c cannot get posted with the closing balances. Unless the closing balances are posted and expenditure ascertained, all the information required for recording the closing entry will not be available. One is dependent on the other making this method impossible.

However, a provisional closing entry may be recorded with the existing information including the debit and credit balances to be carried forward in the expenditure a/c to be able to use this method.