Expense & Income
Adjustments — 4 Concepts
Outstanding · Prepaid · Accrued · Advanced/Unearned — complete journal format
📝 Handwritten Class Note
CA Devesh Thakur’s handwritten note for Day 13 — save it for quick revision!
Watch the ❤️ Instagram Reel for this topic
Why Adjusting Entries Matter?
Accounting ka ek golden rule hai — Accrual Concept: Income aur Expense us period mein record hoti hai jab wo earn/incur hoti hai, na ki jab cash receive/pay hota hai. Isliye hum 4 types ke adjustments karte hain — Outstanding Expense, Prepaid Expense, Accrued Income, aur Advanced/Unearned Income. In 4 concepts ko samjh lo — Final Accounts mein koi bhi adjustment galat nahi hogi!
📌 4 Key Concepts at a Glance
1. Outstanding Expense
Expense incurred but not yet paid
Aisa kharcha jo is period ka hai lekin abhi tak pay nahi kiya. Bill aa gaya, paise dena baki hai.
Example: Electricity Bill (March) — pay April mein karenge.
📍 B/S Impact: Liability Side — Outstanding Expense as current liability.
2. Prepaid Expense
Expense paid in advance for future period
Aisa kharcha jo aane wale period ka hai — abhi pay kar diya. Pehle hi paise de diye, faida future mein hoga.
Example: Rent of Apr–June paid in March.
📍 B/S Impact: Asset Side — Prepaid Expense as current asset.
3. Accrued Income
Income earned but not yet received
Jo income earn ho chuki hai lekin paise receive nahi hue. Kaam complete ho gaya, payment abhi baki hai.
Example: Interest earned for the year but not yet received from bank.
📍 B/S Impact: Asset Side — Accrued Income as current asset.
4. Advanced / Unearned Income
Income received but work not yet done
Paisa advance mein mil gaya, par abhi kaam shuru nahi hua. Pehle hi paise mil gae, kaam future mein hoga.
Example: Rent received in advance for next quarter.
📍 B/S Impact: Liability Side — Unearned Income as current liability.
✍️ Journal Entries — All 4 Adjustments
Outstanding Expense — Electricity Bill (March)
Expense incurred this period — payment pending
📋 P&L Treatment
Electricity A/c (Dr. side of P&L) — full ₹5,000 expense is period ki income ke against match hogi.
📊 B/S Treatment
O/S Electricity A/c → Current Liability on Balance Sheet until paid in April.
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Electricity A/c Nominal (Expense for March period) | 5,000 | — | |
| O/S Electricity A/c Personal (Liability — payment pending) | — | 5,000 |
Prepaid Expense — Rent Paid in Advance (Apr–Jun)
Payment made this period — benefit for next period
📊 B/S Treatment
Prepaid Rent A/c → Asset Side. Ye amount next year automatically Rent Expense ban jayegi.
📋 P&L Treatment
Rent A/c (P&L Dr.) se ₹15,000 hatao — current year ki expense nahi hai. Current year ka nahi hoga.
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Prepaid Rent A/c Personal (Asset — advance paid for next period) | 15,000 | — | |
| Rent A/c Nominal (Reduce — not current period’s expense) | — | 15,000 |
Accrued Income — Income Earned but Not Received
Work done / income earned — cash receipt pending
📊 B/S Treatment
Accrued Income A/c → Asset Side (Current Asset). Yeh receivable hai — cash next period mein aayega.
📋 P&L Treatment
Income A/c → Cr. side of P&L. Is period mein hi income dikhegi — matching concept ke according.
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Accrued Income A/c Personal (Asset — amount receivable) | XX | — | |
| Income A/c Nominal (P&L Cr. — earned this period) | — | XX |
Advanced / Unearned Income — Cash Received, Work Pending
Money received in advance — service/work to be done in future
📊 B/S Treatment
Unearned Income A/c → Liability Side. Yeh obligation hai — future mein service deni hai ya return karna hai.
📋 P&L Treatment
Income A/c Dr. — P&L Cr. side se hatao. Abhi earn nahi hui — next year P&L mein jayegi.
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Income A/c Nominal (Reduce from P&L — not yet earned) | XX | — | |
| Unearned Income A/c Personal (Liability — work to be done in future) | — | XX |
Common Exam Mistakes in These Entries
1. Outstanding Expense: Always credit O/S Expense A/c (Liability) — never credit cash (cash nahi gaya yet).
2. Prepaid Expense: Credit Rent/Expense A/c — NOT cash (cash toh pehle hi ja chuka tha when originally paid).
3. Accrued Income: Debit Accrued Income A/c (Asset) — cash abhi nahi aaya, receivable hai.
4. Unearned Income: It is a Liability — NOT income in P&L this year. Future mein earn hogi.
Easy Memory Trick — Asset or Liability?
EXPENSE side: Outstanding → Liability (still owe) | Prepaid → Asset (benefit still to come)
INCOME side: Accrued → Asset (still to receive) | Unearned/Advanced → Liability (still to deliver)
Quick Formula: “Receive karna baki = Asset | Dena/Karna baki = Liability”
Connection with Previous Days
Day 9: Personal A/c — Accrued Income, Prepaid Expense, O/S Expense, Unearned Income — sab Personal A/c hain (individuals/parties ki tarah behave karte hain).
Day 10: Accrual Concept — expense/income tab record hoti hai jab incur/earn hoti hai, na ki cash movement par.
Day 12: Journal entry format — same Dr./Cr. structure, same Nominal vs Personal classification applies here.
📊 Quick Summary — All 4 Adjustment Entries
| Concept | Account Dr. | Account Cr. | B/S Position |
|---|---|---|---|
| Outstanding Expense | Expense A/c (Nominal) | O/S Expense A/c (Personal) | Liability Side |
| Prepaid Expense | Prepaid Expense A/c (Personal) | Expense A/c (Nominal) | Asset Side |
| Accrued Income | Accrued Income A/c (Personal) | Income A/c (Nominal) | Asset Side |
| Advanced / Unearned Income | Income A/c (Nominal) | Unearned Income A/c (Personal) | Liability Side |
