After the adjustments are known, each one changes the income statement and the statement of financial position at the same time.
An accrued expense raises the expense and creates a liability. A prepayment lowers the expense and creates an asset. This appears in the full final accounts questions, where a trial balance is followed by a list of notes.
It builds on calculating a prepaid amount from dates and income received in advance, and belongs to accruals and prepayments.
What changes when you adjust?
Each adjustment has two effects, and the two always point to a balanced result:
| Adjustment | Income statement | Statement of financial position |
|---|---|---|
| Accrued expense | Expense up, profit down | Current liability up |
| Prepaid expense | Expense down, profit up | Current asset up |
| Income received in advance | Income down, profit down | Current liability up |
The cash and bank figures do not change, because nothing was paid or received because of the adjustment.
How do you adjust a statement, step by step?
- Write the unadjusted figure for each expense from the trial balance.
- Apply each note by adding accruals and subtracting prepayments.
- Recalculate the total expenses and the profit.
- Add the new asset or liability to the statement of financial position.
- Check that the change in profit equals the net of all adjustments, and that the statement still balances.
Worked example
Kedai Gunting Zaki is a hair salon with a year end of 31 December 2025. The trial balance gives revenue RM 60,000, wages RM 20,000, rent RM 9,600 and electricity RM 3,200.
Notes: wages of RM 1,500 are owed, electricity of RM 400 is owed, and rent includes RM 800 paid for January 2026.
Step 1, unadjusted profit: expenses are 20,000 + 9,600 + 3,200 = RM 32,800, so profit is 60,000 − 32,800 = RM 27,200.
Step 2, adjusted expenses:
| Expense | Unadjusted (RM) | Adjustment (RM) | Adjusted (RM) |
|---|---|---|---|
| Wages | 20,000 | + 1,500 | 21,500 |
| Rent | 9,600 | − 800 | 8,800 |
| Electricity | 3,200 | + 400 | 3,600 |
| Total | 32,800 | + 1,100 | 33,900 |
Step 3, adjusted profit: 60,000 − 33,900 = RM 26,100. Check: 27,200 − 1,100 = 26,100.
Step 4, the statement of financial position. Suppose the salon has equipment RM 28,000 and bank RM 11,200. Opening capital is RM 30,000 and drawings are RM 18,000.
| RM | |
|---|---|
| Equipment | 28,000 |
| Prepayments (rent) | 800 |
| Bank | 11,200 |
| Total assets | 40,000 |
| Capital: opening 30,000 + profit 26,100 − drawings 18,000 | 38,100 |
| Accrued expenses (wages 1,500 + electricity 400) | 1,900 |
| Total capital and liabilities | 40,000 |
Both totals are RM 40,000, so the statement balances. The accruals of RM 1,900 reduced profit, and the prepayment of RM 800 added an asset.
The mistake to watch for
A common slip is to adjust the profit but leave the asset or liability out, or to subtract an accrual because it sounds like a deduction.
Mistaken answer: Wages RM 18,500 (20,000 − 1,500), profit RM 28,700, and no accrued expenses shown.
The student subtracted the accrual and then forgot the liability.
The correction is that an amount owed is an extra cost, so wages are 20,000 + 1,500 = RM 21,500. The RM 1,500 is then shown as a current liability. If the statement of financial position is out of balance by exactly the amount of an accrual or prepayment, check whether the second effect was left out.
Check yourself
Try these on paper, then open each answer.
1. Profit before adjustments is RM 18,500. An accrual of RM 350 and a prepayment of RM 120 are then found. What is the adjusted profit?
Show answer
The accrual lowers profit and the prepayment raises it. 18,500 − 350 + 120 = RM 18,270.
2. The telephone account shows RM 1,260 paid. A bill of RM 210 for the last month is unpaid. What is the telephone expense?
Show answer
1,260 + 210 = RM 1,470, and the RM 210 is a current liability.
3. A business has trade payables of RM 5,000 and accrued expenses of RM 640. What are its total current liabilities?
Show answer
5,000 + 640 = RM 5,640. Accrued expenses are current liabilities, so they are added to trade payables.
Where this leads next
The last lesson in this module shows the full ledger method with opening and closing balances, in separating cash paid from expense recognised. The double-entry and ledger trainer lets you test where each entry lands, and the module overview lists the whole route.
If your final accounts balance only after repeated rewrites, a teacher can look at your layout and order of working in online one-to-one Accounting tuition.