It is the good question and every accounting student should know the reason of adjustment of the amount of outstanding expenses. Will it adjust for completing journal entries? Will it adjust for completing ledger accounts? Will it adjust for showing mathematical correctness in trial balance?
Answer is no. We adjust the amount of outstanding expenses just for showing correct financial position in financial statements. Our financial statement will show true and fair view of financial statements because we have shown its effect on the financial statements. Financial statements are studied by all interested parties instead of studying journal entries, ledger accounts and trial balances. So, we have to add outstanding expenses in all paid expenses for showing correct net profit in the income statements.
Outstanding expenses are due but not paid. So, by showing it in the income statement and deducting from total incomes, our net profit will show correctly. We also show outstanding expenses as our current liability in our balance sheet because our interested parties will interested to know our working capital position. When we show the outstanding expenses in the current liabilities, our interested parties will calculate the correct ratios and working capital. It will be helpful for taking their decisions correctly.
For showing above adjustment, we have to pass a simple adjustment entry. In this adjustment entry, we will debit the expense account and credit the outstanding expenses account. Now, with this journal entry, our outstanding expenses will add in our paid expenses in the profit and loss account. Other side, outstanding expense account balance will show as the current liability in the balance sheet.