Special Purpose Books
Part 5 — Adjustment Entries
Outstanding Expense · Prepaid · Accrued Income · Unearned Income · Interest on Capital · Depreciation
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Adjustment Entries — 6 Important Types 📋
Day 25 mein humne Types of Accounting Entries overview kiya. Aaj Day 26 mein hum 6 Adjustment Entries detail mein padhenge — inhe Closing Adjustments bhi kaha jaata hai. Yeh entries year-end pe P&L A/c aur Balance Sheet ko accurate banane ke liye ki jaati hain. P&L mein sirf current year ki income/expense aani chahiye — in 6 adjustments se hum exactly wahi ensure karte hain. Har entry mein: Meaning, Original Entry, Adjustment Entry, P&L effect aur Balance Sheet impact clearly samjhenge.
📊 Where Do These Adjustments Appear?
✍️ All 6 Adjustment Entries — Detailed
Outstanding Expense — Expense Due but Not Paid
Expense incurred this year — payment pending — Liability created
Example: Salary for March ₹10,000 — will be paid in April.
📋 P&L Impact
Expense ↑ — Salary Expense increases on Dr. side of P&L
📊 Balance Sheet Impact
Outstanding Salary shown as Current Liability
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Salary A/c Nominal (Expense increases — current year) | 10,000 | — | |
| Outstanding Salary A/c Personal (Current Liability — payment pending) | — | 10,000 |
Prepaid Expense — Paid Now, Benefit Next Year
Expense paid in advance — portion belongs to next year — Asset created
Example: Insurance ₹12,000 paid for one year. At year-end, ₹3,000 relates to next year.
📋 P&L Impact
Expense ↓ — Insurance Expense decreases (₹3,000 removed from P&L)
📊 Balance Sheet Impact
Prepaid Insurance shown as Current Asset
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Prepaid Insurance A/c Personal (Current Asset — next year ka benefit) | 3,000 | — | |
| Insurance A/c Nominal (Expense reduces — not current year’s) | — | 3,000 |
Accrued Income — Earned but Not Yet Received
Income earned this year — cash not yet received — Asset created
Example: Commission receivable ₹8,000.
📋 P&L Impact
Income ↑ — Commission Income increases on Cr. side of P&L
📊 Balance Sheet Impact
Accrued Income shown as Current Asset
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Accrued Income A/c Personal (Current Asset — receivable) | 8,000 | — | |
| Commission A/c Nominal (Income increases — earned this year) | — | 8,000 |
Income Received in Advance — Unearned Income
Cash received — service not yet provided — Liability created
Example: Rent ₹60,000 received for one year. Only ₹15,000 is earned this year (remaining ₹45,000 is unearned).
📋 P&L Impact
Income ↓ — Rent Income decreases (₹45,000 removed from P&L)
📊 Balance Sheet Impact
Income Received in Advance shown as Current Liability
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Rent A/c Nominal (Income reduces — not yet earned) | 45,000 | — | |
| Rent Received in Advance A/c Personal (Current Liability — service yet to be provided) | — | 45,000 |
Interest on Capital — Reward for Owner’s Investment
Business treats it as expense — Capital increases by same amount
Example: Capital ₹5,00,000 @ 10% = ₹50,000.
📋 P&L Impact
Expense ↑ — Interest on Capital increases on Dr. side of P&L
📊 Balance Sheet Impact
Capital increases — shown on Liability side of B/S
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Interest on Capital A/c Nominal (Expense — P&L Dr. side) | 50,000 | — | |
| Capital A/c Personal (Capital increases — B/S Liability side) | — | 50,000 |
Depreciation — Systematic Reduction in Fixed Asset Value
Use, wear & tear, obsolescence — Asset value reduces each year
Example: Machinery ₹2,00,000 @ 10% = ₹20,000.
📋 P&L Impact
Expense ↑ — Depreciation Expense increases on Dr. side of P&L
📊 Balance Sheet Impact
Fixed Asset value decreases — shown net of depreciation
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Depreciation A/c Nominal (Expense — P&L Dr. side) | 20,000 | — | |
| Machinery A/c Real (Asset value reduces — B/S) | — | 20,000 |
Easy Memory Trick — P&L Effect
Increase P&L (Dr. side — more expense / Cr. side — more income):
① Outstanding Expense (expense ↑) | ③ Accrued Income (income ↑) | ⑤ Interest on Capital (expense ↑) | ⑥ Depreciation (expense ↑)
Decrease P&L (expense ↓ or income ↓):
② Prepaid Expense (expense ↓) | ④ Unearned Income (income ↓)
Common Mistakes — Adjustment Entries
1. Outstanding vs Prepaid confuse karna: Outstanding = expense HUI, pay NAHI (Liability) | Prepaid = pay KAR DI, benefit NAHI MILA (Asset).
2. Accrued vs Unearned confuse karna: Accrued Income = earn HUI, cash NAHI AAYA (Asset) | Unearned = cash AAYA, service NAHI DI (Liability).
3. Interest on Capital — cash entry samajhna: Interest on Capital = notional charge — no cash movement. Dr. P&L, Cr. Capital only.
4. Depreciation credit side: Dep A/c Dr. → Asset A/c Cr. (asset reduces) OR → Accumulated Dep. A/c Cr. (provision method). Never credit P&L directly.
Connection with Previous Days
Day 13-14 (Adjustments Part 1 & 2): Outstanding, Prepaid, Accrued, Unearned — already covered there. Aaj same entries ko P&L + Balance Sheet impact ke saath revisit kiya — more detail.
Day 15 (Depreciation): Dep A/c Dr. → Asset A/c Cr. — same entry ⑥ yahan hai.
Day 25 (Types of Entries): Yeh sab Adjustment Entries (Type 5) hain — aaj unhe comprehensive taur pe padha.
📊 One-Page Quick Revision — All 6 Adjustments
| Adjustment | Journal Entry | P&L Effect | Balance Sheet |
|---|---|---|---|
| ① Outstanding Expense | Expense A/c Dr. → O/S Expense A/c Cr. | Expense ↑ (Dr.) | Liability ↑ |
| ② Prepaid Expense | Prepaid Expense A/c Dr. → Expense A/c Cr. | Expense ↓ (Cr.) | Asset ↑ |
| ③ Accrued Income | Accrued Income A/c Dr. → Income A/c Cr. | Income ↑ (Cr.) | Asset ↑ |
| ④ Unearned Income | Income A/c Dr. → Income in Advance A/c Cr. | Income ↓ (Dr.) | Liability ↑ |
| ⑤ Interest on Capital | Int. on Capital A/c Dr. → Capital A/c Cr. | Expense ↑ (Dr.) | Capital ↑ |
| ⑥ Depreciation | Depreciation A/c Dr. → Asset/Accum. Dep. Cr. | Expense ↑ (Dr.) | Asset ↓ |