Final Accounts Adjustments Class 11: Outstanding, Prepaid, Accrued and Advance Items
Updated 17 October 2026 · Fact-checked
Four timing adjustments make the accounts follow the accrual basis. Outstanding expense: add to the expense in P&L and show as a current liability. Prepaid expense: deduct from the expense and show as a current asset. Accrued income: add to income and show as a current asset. Income received in advance: deduct from income and show as a current liability. Each adjustment has a double effect.
Outstanding expense and accrued income are added in P&L; prepaid expense and income in advance are deducted; each also appears in the Balance Sheet.
Illustration drawn for QuestionBuddy.
Understand Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance
Why adjust. The trial balance records cash paid and received, but the Profit and Loss Account must show the expenses of the year and the income of the year.
1. Outstanding expenses (incurred, not yet paid). P&L: expense paid + outstanding. Balance sheet: current liability (outstanding expenses).
2. Prepaid expenses (paid, benefit in the next period). P&L: expense paid − prepaid. Balance sheet: current asset (prepaid expenses).
3. Accrued income (earned, not yet received). P&L: income received + accrued. Balance sheet: current asset (accrued income).
4. Income received in advance (received, belongs to the next period). P&L: income received − advance. Balance sheet: current liability.
When the question gives the opening and closing figures. Expense for the year = Expense paid − Outstanding at the beginning + Outstanding at the end + Prepaid at the beginning − Prepaid at the end. For incomes use the reverse signs.
Part-period method. An insurance premium of ₹18,000 paid on 1 October for 12 months, at 31 March: used 6 months = ₹9,000; prepaid = ₹9,000.
Unadjusted profit. To correct a given profit: outstanding expense reduces profit; prepaid expense increases profit; accrued income increases profit; advance income reduces profit.
Presentation. In the balance sheet show each under current liabilities or current assets as noted above; if the trial balance already carries the item (for example "outstanding rent" in the trial balance), only the balance sheet is affected for that item.
Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance: key facts
- Expense
- Paid + Outstanding at the end − Outstanding at the beginning + Prepaid at the beginning − Prepaid at the end
- Expense for the year.
- Income
- Received + Accrued at the end − Accrued at the beginning + Advance at the beginning − Advance at the end
- Income for the year.
- Double effect
Outstanding expense P&L debit up, liability Prepaid expense P&L debit down, asset Accrued income P&L credit up, asset Advance income P&L credit down, liability - Every adjustment affects P&L and balance sheet.
- Profit correction
Outstanding minus Prepaid plus Accrued plus Advance minus - Starting from unadjusted profit.
How to answer Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance questions
Take each adjustment through P&L and balance sheet separately.
- 1Write the figure in the trial balance (paid or received).
- 2Apply the adjustment to the expense or income for the P&L.
- 3Place the adjustment in the balance sheet as an asset or a liability.
- 4For opening balances use the formula with opening and closing balances.
- 5Summarise the net effect on profit.
Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance in real life
The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Rent not yet paid
Suppose a clinic has paid rent of ₹36,000 in the year, but ₹3,000 is due for the last month and is unpaid.
What is the rent for the year and how is ₹3,000 shown?
Try it first, then show the solutionSolution
- Rent for the year = 36,000 + 3,000 = ₹39,000.
- The ₹3,000 unpaid is a current liability (outstanding rent).
Answer: Rent ₹39,000 in P&L; outstanding rent ₹3,000 as a current liability.
Memory hook: Used but not paid: add and owe.
Tricks to remember Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance
Short memory aids. Say each one aloud once, then use it on a question the same day.
OP-AA
Outstanding adds to expense and is owed; Prepaid is deducted and is an asset; Accrued adds to income and is an asset; Advance is deducted from income and is owed.
Use it when: Four adjustments.
Unadjusted profit
Owed things reduce profit; owned things increase it.
Use it when: Profit correction.
Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Prepaid expense · 1 mark · MCQBoard level
Insurance of ₹12,000 was paid in the year, of which ₹4,000 relates to the next year. The amount charged to the Profit and Loss Account is:
(a) ₹12,000
(b) ₹8,000
(c) ₹16,000
(d) ₹4,000
Try it first, then show the solutionSolution
- Deduct the prepaid part from the amount paid.
Answer: (b) ₹8,000
Example 2: Treatment · 3 marks · Short answerBoard level
Show how each is treated in P&L and the balance sheet: (i) outstanding wages ₹5,000; (ii) interest received in advance ₹2,000. (3 marks)
Try it first, then show the solutionSolution
- (i) Wages in P&L increase by 5,000; balance sheet shows outstanding wages as a current liability.
- (ii) Interest income in P&L is reduced by 2,000; balance sheet shows income received in advance as a current liability.
Answer: Outstanding wages: add and liability. Advance interest: deduct and liability.
Example 3: Five adjustments together · 5 marks · Long answerHarder board level
Rent paid ₹36,000 (outstanding ₹3,000); salaries paid ₹60,000 (outstanding ₹5,000); insurance paid ₹12,000 (prepaid ₹4,000); interest received ₹6,000 (accrued ₹1,500); commission received ₹9,000 (received in advance ₹2,000). The profit before these adjustments is ₹85,000. Find the figures for the P&L, the net effect on profit and the adjusted profit. (5 marks)
Try it first, then show the solutionSolution
- Rent = 36,000 + 3,000 = 39,000. Salaries = 60,000 + 5,000 = 65,000. Insurance = 12,000 − 4,000 = 8,000.
- Interest income = 6,000 + 1,500 = 7,500. Commission = 9,000 − 2,000 = 7,000.
- Effect on profit: −3,000 − 5,000 + 4,000 + 1,500 − 2,000 = −4,500.
- Adjusted profit = 85,000 − 4,500 = ₹80,500.
- Balance sheet: liabilities: outstanding rent 3,000, outstanding salaries 5,000, commission in advance 2,000; assets: prepaid insurance 4,000, accrued interest 1,500.
Answer: Adjusted profit ₹80,500; net effect −₹4,500.
Example 4: Opening and closing balances · 4 marks · Short answerHarder board level
Rent paid during the year was ₹36,000, which includes ₹6,000 for the previous year. Rent outstanding at the end of the year was ₹3,000. Find the rent for the year and state how the outstanding rent is shown in the balance sheet. (4 marks)
Try it first, then show the solutionSolution
- Rent for the year = 36,000 − 6,000 (last year's) + 3,000 (outstanding) = ₹33,000.
- The ₹6,000 paid belongs to the previous year, so it is deducted from this year's rent.
- The ₹3,000 outstanding is added to this year's rent and shown in the balance sheet as a current liability.
Answer: Rent for the year ₹33,000; outstanding rent ₹3,000 shown as a current liability.
Example 5: Reading the effect · 4 marks · Short answerHOTS / competency
A student says, "Prepaid insurance reduces profit because it is an extra payment." Explain her error with the figures: insurance paid ₹12,000, prepaid ₹4,000. State the effect on profit and on the balance sheet. (4 marks)
Try it first, then show the solutionSolution
- Insurance charged for the year = 12,000 − 4,000 = ₹8,000.
- The ₹4,000 is a payment for the next period, so it is removed from this year's expense.
- Profit is higher by ₹4,000 than if the whole ₹12,000 had been charged; the balance sheet shows prepaid insurance ₹4,000 as a current asset.
- It does not reduce profit.
Answer: Prepaid insurance raises profit by ₹4,000 and is a current asset.
Where students lose marks in Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance
The slips examiners see most often, and what to write instead.
Mistake: Adding a prepaid expense
Using the outstanding rule.
Wrong working
Insurance = 12,000 + 4,000.
Right working
Insurance = 12,000 − 4,000 = 8,000.
Do this: Prepaid is deducted.
Usually costs: 1 mark
Mistake: Showing outstanding expense as an asset
Wrong side of balance sheet.
Wrong working
Outstanding rent under current assets.
Right working
Outstanding rent under current liabilities.
Do this: It is owed.
Usually costs: 1 mark
Mistake: Single-effect adjustments
Showing only the P&L effect.
Wrong working
Rent 39,000 only.
Right working
Rent 39,000 in P&L and outstanding rent 3,000 in the balance sheet.
Do this: Every adjustment has a double effect.
Usually costs: 1 mark
Exam tips
- Draw a small table: paid, adjustment, P&L figure, balance sheet figure.
- Write "current liability" or "current asset" next to each.
- Check the net profit effect at the end.
- Use the opening/closing formula when previous-year balances are given.
Practice questions on Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 1 mark · MCQBoard level
Income received in advance is shown in the balance sheet under:
(a) current assets
(b) current liabilities
(c) capital
(d) non-current assetsHint
The firm owes the service.
Answer
(b) current liabilities
Q2 · 3 marks · Short answerHarder board level
Salaries paid during the year ₹1,20,000. Salaries outstanding at the beginning ₹10,000 and at the end ₹15,000. Find the salaries charged to P&L. (3 marks)
Hint
Opening is deducted.
Answer
Salaries = 1,20,000 − 10,000 + 15,000 = ₹1,25,000.
Q3 · 4 marks · Short answerHarder board level
Rent received during the year ₹48,000 including ₹6,000 for next year. Rent due but not received at the end ₹4,000. Find the rent income for the year and show the balance sheet items. (4 marks)
Hint
Advance out, accrued in.
Answer
Rent income = 48,000 − 6,000 + 4,000 = ₹46,000. Balance sheet: rent received in advance ₹6,000 (current liability); accrued rent ₹4,000 (current asset).
Q4 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Outstanding expenses reduce the net profit.
Reason (R): The expense of the year is increased by the amount outstanding.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.Hint
Adds to expense.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q5 · 5 marks · Short answerHOTS / competency
Net profit before adjustments is ₹1,12,000. Adjustments: outstanding wages ₹4,000; prepaid insurance ₹2,500; accrued commission ₹3,000; rent received in advance ₹5,000. Find the adjusted net profit and name the balance sheet item for each. (5 marks)
Hint
Sign each item.
Answer
Adjusted profit = 1,12,000 − 4,000 + 2,500 + 3,000 − 5,000 = ₹1,08,500. Outstanding wages: current liability; prepaid insurance: current asset; accrued commission: current asset; rent received in advance: current liability.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.Outstanding expense in P&L?Show answer
Added to the expense.
2.Prepaid expense in P&L?Show answer
Deducted from the expense.
3.Accrued income is?Show answer
A current asset.
4.Income received in advance is?Show answer
A current liability.
5.Which two adjustments increase profit?Show answer
Prepaid expenses and accrued income.
Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance: frequently asked questions
Why do adjustments have a double effect?
Each appears in the profit and loss account and also as an asset or liability in the balance sheet.
Is outstanding rent a liability?
Yes, a current liability.
Can the same item be both outstanding and prepaid?
No; at a given date it is one or the other.