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At times certain expenditures remain outstanding at the end of the accounting period which has not been paid within the accounting period. For example, let us consider that you are following an accounting year commencing01 January and ending it on31 December. On31 December let us say that you were to pay the factory rent which you paid only on30 January next year.
Now, for the purpose of accounting the expenditure (revenue expenditure) belonged to a prior period but paid in current year. So when you make the final accounts of previous financial year, the amount of rent remained outstanding has to be charged off against profit of that year. at the same time, the outstanding expenditure becomes a liability for the company and takes a place in the balance sheet as well.
when you pay this outstanding rent in current year the accounting treatment will be similar to paying off a debt (payment to a creditor) and not that of incurring an expense.
