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ACCOUNTING ADJUSTMENTS | Prof. Adnan Rashid M.Phil. (Finance), M.COM (Finance)

Accounting Adjustments

Outstanding expenses are those expenses, which are incurred but not yet paid till the end of this

period. These expenses are added to the expenses in income statement. On the other hand, such

outstanding expenses are shown on liability side in the balance sheet.

Income statement Balance sheet

Salaries expenses Liability:

Add: Outstanding expenses Add: outstanding salaries

Prepaid expenses are those expenses, which are paid in advance for the future period. The example of

such expenses is a prepaid talk time in your mobile connection. Such expenses are deducted from

expenses portion in the income statement and also added to asset side on balance sheet.

Income statement Balance sheet

Salaries expenses Asset:

Less: Prepaid expenses Add: Prepaid salaries

Accrued Revenue is such type of revenue that is earned but not yet received. Such revenue represents

the amount not yet received as an asset for the company. Such amount is added to operating income

and also shown on the asset side of the balance sheet.

Income statement Balance sheet

Operating Income Asset:

Add: Accrued revenue Add: Accrued revenue

Unearned revenue is such kind of revenue that is received in advance but not yet earned. Organization

has to fulfill the claim against such advance revenue in near future. So, such revenue is added to

operating income on income statement and also shown on the balance sheet under the liability side.

Income statement Balance sheet

Operating Income Liability:

Add: Unearned revenue Add: Unearned revenue

Interest on capital represents the cost that the organization bear on acquiring the capital from different

sources like; debt, equity and preferred stock. Such amount of cost is deducted from operating income

under the head of financial cost and is shown on the liability side of the balance sheet as addition to

capital.

Income statement Balance sheet

Operating Income Liability:

Less: financial cost Add: addition to capital

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ACCOUNTING ADJUSTMENTS | Prof. Adnan Rashid M.Phil. (Finance), M.COM (Finance)

Interest on Drawing represents the extra amount imposed on drawing by the business, such amount is

imposed to discourage the owner about withdrawal of amount. Such amount of interest is indirect

income for the business and hence shown on income statement as addition to operating income under

the head other income. On the other hand, such amount is added to drawings and then total drawing is

deducted from capital on the liability side of balance sheet.

Income statement Balance sheet

Operating Income Liability:

Add: other income Drawings

Add: addition to drawings

Depreciation on assets such kind of expenses are non-cashable in nature, and hence no logic for display

on income statement, but organizations for the sake of tax reduction on revenues. In this regard, such

depreciation charges are included in operating expenses in income statement and less from value of an

asset in the balance sheet.

Income Statement Balance Sheet

Operating Expenses Assets

Depreciation Expenses less: Depreciation Expense