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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Salary of Rs 12,000 for March remains unpaid on 31 March, the end of the accounting year of Kapoor Stores. In the final accounts, how should this be treated?

Outstanding salary is added to the salaries expense in the Profit and Loss Account and shown as a current liability in the Balance Sheet, because under the accrual basis expenses are recorded for the period in which they are incurred, whether or not they have been paid.

  1. AIgnore it, as no cash has been paid
  2. BAdd Rs 12,000 to salaries in the Profit and Loss Account and show Rs 12,000 as an outstanding liability in the Balance SheetCorrect
  3. CDeduct Rs 12,000 from salaries in the Profit and Loss Account and show it as an asset
  4. DShow Rs 12,000 as a deduction from capital only

Explanation

Under the accrual basis, expenses of the year are charged whether paid or not. The unpaid Rs 12,000 is added to salaries expense and shown as an outstanding expense (current liability). Ignoring it would overstate profit; treating it as an asset reverses its nature.

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