Q: I want to know how do you make the following journal entries (rs = Rupees = Indian currency):
1. Outstanding expense - rs 3,000 2. Accrued interest - rs 4,000 3. An amount of rs 1,000 has been paid in advance
A: Here are the journal entries for the above transactions:
1. Dr Expense 3,000 Cr Expense payable (liability account) 3,000 (The exact name of the "expense payable" account depends on the expense. For example, you could have "wages payable" or "rent payable". This "______ payable" account is a liability account.)
2. Dr Interest expense 4,000 Cr Bank 4,000 (The interest expense is deducted directly from your bank account so I credit the bank here)
3. Dr Prepaid expense 1,000 Cr Bank 1,000 (The prepaid expense is actually an asset type of account. Because you have paid something before you needed to, it is like the people you are paying actually owe you. So it's an asset account and to be more specific it's actually a type of debtor account. Hope that makes sense...)
I don't really cover prepaid income and prepaid expenses (accrual entries) on this website in any detail, however there are lessons on accruals in my accounting book.