Introduction
In this article we will learn about the adjustment for Provision for outstanding expenses in partnership accounts.
Please note that the adjustment will be done in a similar manner whether you are doing admission, retirement, death or change in profit ratio question. You need not understand the adjustments separately for these chapters.
Meaning of outstanding Expenses
- Outstanding expenses means expenses
- which have become due for payment but
- are not yet paid.
- These are also known as expenses payable. Lets see few examples of outstanding expenses below
- Any expenses which we pay in cash or bank, and enter in profit and loss account debit side, can become outstanding if it is not paid by its due date. Few examples are Rent, Interest, Salary, Electricity, Repairs, advertisement, insurance.
Example of Outstanding Salary
Suppose in my firm I pay salary to all employees on the last date of the month. So every month I will pay salary lets say on 30th April or 30th September or 31st January etc.
In the month of march the salary will be payable on 31st March. Suppose I do not pay salary on that date due to some reason, then it will be called outstanding salary till the date I will pay the salary.
Example of Outstanding Electricity Expenses
Suppose due date for paying electricity bill every month is 25th.
If I do not pay the bill, till that date then, it will be called outstanding electricity Expenses
How adjustment given in the question
- Provision of Rs 2000 to be made for outstanding bill for repairs.
- Outstanding repairs Rs 2000 to be provided for.
- Provision to be made for Rs 2000 for outstanding legal charges.
- Outstanding rent payable Rs 2000.
- There is additional liability for outstanding salaries payable to employees
Please note that what whatever the language in question is, the adjustment will be done in similar manner. Let's understand how to do this adjustment.
Understand the adjustment
Outstanding expense is a liability. Debit and Credit rules for liability will apply. So increase in outstanding expenses gets credited, and decrease in outstanding expenses gets debited.
It is an unpaid liability, for which we now have to pass an entry in books of accounts
The liability of the firm will increase due to this entry.
Since the Book Value of liability will increase, so there will be Revaluation Loss
Journal Entry
- Revaluation A/c Dr.. Rs 2000
- To Provision for Outstanding Expenses A/c Rs 2000
Outstanding Expenses is a liability which is increasing, so it gets credited. In case of increase in liabilities we have a loss, so revaluation account gets debited.
Treatment in Revaluation Account
| Particulars | Amount | Particulars | Amount |
| To Provision for Outstanding Expense | 2000 |
Since there is a loss, so it will be shown on debit side of revaluation account.
There will be no entry on the credit side of revaluation account.
Remember in examination question replace the word "expense" by the type of expense like rent, salary, etc as given in the question.
Treatment in Partner Capital A/c
| Particulars | A | B | Particulars | A | B |
There will be no impact in partner capital account as we have not passed any entry in partner capital account
Treatment in Balance Sheet
| Liabilities | Amount | Assets | Amount |
| Prov for Outstanding Expenses | +2000 |
In the balance sheet the value of Liabilities will be increased. In our example on the Liabilities side we will write outstanding expenses or expenses payable Rs 2,000. Remember in examination question replace the word "expense" by the type of expense like rent, salary, etc as given in the question.
Finally
That's all for this adjustment. Please go through below links for more partnership accounts adjustments on reconstitution.
