How to adjust accrued and unearned income

Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements

What you need

• A Trial Balance at the closing date showing the income account balances (e.g. Rent Income, Commission Income).
• Adjustment notes stating the amount of income not yet received (accrued) or not yet earned (unearned).
• An understanding of double entry (debit and credit) and the position of current assets and current liabilities.
• The start and end dates of the accounting period so the monthly or yearly income is calculated correctly.

Step by step

1. 1

   Understand the two income adjustments

   Accrued income (hasil terakru / hasil belum terima) is income the business has already earned during the period but has not yet received in cash by the closing date; it is an asset. Unearned income (hasil terdahulu / hasil belum terperoleh) is income already received in cash but not yet earned because it relates to the next period; it is a liability. In the example, Perniagaan Setia closes its accounts on 31 December 2024 and earns two kinds of income: rent (Hasil Sewa) and commission (Hasil Komisen).

2. 2

   Identify the adjustment from the notes

   Read the Trial Balance and adjustment notes. The Trial Balance shows Rent Income RM6,600 (credit) and Commission Income RM4,800 (credit). Note (i): the tenant pays RM600 per month and December's rent of RM600 has not yet been received. Note (ii): RM800 of the commission received relates to January 2025. This tells you rent is accrued (not yet received) and part of the commission is received in advance (not yet earned).

3. 3

   Calculate the accrued income

   Rent should be RM600 x 12 = RM7,200 for the full year, but only RM6,600 (11 months) was received. The accrued amount is RM7,200 - RM6,600 = RM600. This is the accrued rent income (Hasil Sewa Terakru) to be adjusted.

4. 4

   Record the double entry for accrued income

   Open an Accrued Rent Income account (an asset) and record: Debit Accrued Rent Income RM600; Credit Rent Income RM600. This raises the total rent income for the year to RM7,200 and creates a RM600 asset representing money still owed to the business.

5. 5

   Calculate and record unearned income

   The RM800 commission belongs to next year, so it must be removed from this year's income. Record: Debit Commission Income RM800; Credit Commission Received in Advance RM800. This reduces commission income for the year to RM4,800 - RM800 = RM4,000 and creates a RM800 liability, Commission Received in Advance (Hasil Komisen Terdahulu).

6. 6

   Adjust the figures in the Income Statement

   In the Add: Income section, show Rent Income at RM7,200 (RM6,600 received + RM600 accrued) and Commission Income at RM4,000 (RM4,800 received - RM800 unearned). Only income earned for the current period is included, so the net profit is neither overstated nor understated.

7. 7

   Show the balances in the Statement of Financial Position

   Under Current Assets, record Accrued Rent Income RM600. Under Current Liabilities, record Commission Received in Advance RM800. Cross-check that the same figures used in the Income Statement adjustment appear here, so the double entry is complete and the statement balances.

Second example

Kedai Harmoni closes its accounts on 30 June 2024 and earns interest income (Hasil Faedah) of RM150 a month on a fixed deposit, that is RM1,800 a year, but only RM1,350 (nine months) was received by the closing date. The accrued interest is RM1,800 - RM1,350 = RM450, recorded as Debit Accrued Interest Income RM450; Credit Interest Income RM450. This raises interest income to RM1,800 and shows Accrued Interest Income RM450 as a current asset.

In the same year, Kedai Harmoni received RM1,200 rent from a tenant, of which RM300 relates to July 2024 (the next period). The adjustment is Debit Rent Income RM300; Credit Rent Received in Advance RM300. This reduces rent income to RM900 and shows Rent Received in Advance RM300 as a current liability. Notice that the same income account can be accrued in one business and unearned in another; the direction of the entry depends only on whether the income has been earned.

Common mistakes

Related chapter: Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements →

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