The word outstanding indicates due and salary indicates expense, then it becomes a liability for the firm after both words are combined. An Outstanding salary is a salary that is yet to be paid, that has to be paid. At the end of the financial year, it is recorded in two statements account first is profit and loss statement & second is a balance sheet
- Outstanding salary is recorded as an expense on the debit side of a profit and loss account.
- On the other side, it is recorded as a liability on the credit side of the balance sheet.
Is Outstanding salary an expense or liability?
Yes, an outstanding salary is an expense and liability both. It is recorded two times with different names as we wrote above, recorded as an expense on the debit side of the P&L Account and recorded as a liability on the credit side under current liabilities of the balance sheet. In simple words, its journal entry is recorded in accounting statements that show an expense that is yet to be paid to the staff in exchange for their provided services or invested efforts for the firm.
What happens if the salary is not paid?
Before the date of salary distribution, it is treated as an expense by the firm but when the date is gone out, it is treated as a liability by the firm, it becomes an outstanding salary. That’s why it is recorded as an expense in the profit and loss account before the salary date but recorded as a liability once the date of salary distribution is gone. Both expense and liability are a burden on the firm which needs to be clear immediately before the financial year end. When it comes to paying, it is paid from the firm’s capital that is in the firm’s fund account to meet expenses or liability.
What journal entry is passed?
- When outstanding salary is paid
- When outstanding salary is not paid
This journal entry is passed when outstanding salary is paid:
Outstanding salary A/C
To Cash A/C
This journal entry is passed when outstanding salary is not paid:
To Outstanding Salary A/C
(Salary is shown as an expense and loss but the outstanding salary is a liability that increases the credibility of the firm).
What is the other name of outstanding salary?
When salary is not paid on time, it is called a salary payable in the balance sheet under current liabilities and other entries are passed in profit and loss account. Outstanding salaries are counted in outstanding expenses which are due, not paid in the current accounting period. It is a personal expense for the firm that is paid out from the firm’s capital at the end of an accounting period of the year. Also, the expense is recorded under two accounts such as outstanding expense and an expense account that shows the firm’s expense which is due. Outstanding salary increases the value of the credit side of liability and the value of the expense.
What happens if the salary is not paid on time?
If salary is not paid on time, the firms need to pay the interest along with salary. No justification is required for late-paying salary because an employee can file a case against a firm for not paying the salary and also get interest from the firm to recover their court expense. So the firm has to pay the wages and salary before the financial year ends without paying any interest. The firms should not be involved in fraudulent activities, if they do, they will bear big penalties and may stop their company until the case is solved. Employees take strict actions if the firm cheats them.