Today, I got the accounting problem through Facebook chat. To use facebook chat is very enjoyable and simple.
I could not give best answer at that time and writing now it after research on this topic.
And my answer is
Let me explain in detail :
Suppose, you are businessman and you have one employee. Your have paid $ 100 end of each month to his employee. But in the end of Dec. you paid nothing to your employee in the end of Dec. Your accountant has to close the books every Dec. What will he do. Because it is the duty of businessman to pay $ 100 end of each month and he did not pay. It means it has created liability of businessman. For showing liability in final accounts, he will pass the adjustment entry of this outstanding expenses with following way
Salary Account Dr. $ 100
Outstanding Salary Account ( Salary payable account ) Cr. $ 100
and then he will add this outstanding salary in debit side's profit and loss account's paid salary and also show it in liability side of balance sheet.
But beginning of if he did not include outstanding salary in opening entry. Then he will pass the reversing entry to show the Nil amount of outstanding salary. This entry will just opposite the above adjusting entry.
Outstanding Salary Account Dr. $ 100
Salary Account Cr. 100
Its effect will be that your salary liability will be become zero. Suppose business man paid $ 100 to his employee after one and half month ( 15 Jan. ), then accountant can pass simple payment journal entry and it will save businessman to record double.
Salary Account Dr. $ 100
Bank Account Cr. $ 100
This system is used in USA, Pakistan and many other countries. But in India, we just pass the opening journal entry and include all outstanding expenses in it. After this we pass the payment entry from direct by debiting outstanding expenses.
Outstanding expenses Dr $ 100
Bank Account Cr. $ 100
Effect of both is same. It is on accountant which method will he choose.
Thanks Noman Khan for asking question.
