Adjustments to Nominal Accounts

Explanation

Nominal accounts are the revenue and expense accounts that are reported in the Income Statement (Penyata Pendapatan) for a given accounting period. Under the accrual principle, revenue is recognised when it is earned and expenses when they are incurred, regardless of whether the cash has been received or paid. Because many entries during the year are recorded on a cash-movement basis, the balances of the nominal accounts on the balance date do not always reflect the true amount that belongs to the current period. Therefore, on the balance date, adjustments to the nominal accounts (pelarasan akaun nominal) must be made so that the revenue and expenses reported are accurate for that period, in line with the matching concept.

There are four main adjustment items for nominal accounts. A Prepaid Expense (Belanja Prabayar) is an expense already paid for a future period, for example insurance paid in advance; it is treated as a current asset because the business is still entitled to that benefit. An Accrued Expense (Belanja Belum Bayar) is an expense already incurred in the current period but not yet paid, for example the final month's rent still outstanding; it is treated as a current liability. Accrued Income (Hasil Belum Terima) is income already earned in the current period but not yet received in cash, for example commission that is already due; it is treated as a current asset. Unearned Income (Hasil Belum Terperoleh) is income already received in cash but not yet earned because the service has not been provided for the period, for example rent received in advance; it is treated as a current liability.

All adjustments are first recorded in the General Journal (Jurnal Am) before being posted to the ledger. To get the double entry right, identify the type of adjustment account created. For a Prepaid Expense, debit the prepaid account (an asset) and credit the relevant expense account to reduce the expense. For an Accrued Expense, debit the expense account to increase the expense and credit the accrued expense account (a liability). For Accrued Income, debit the accrued income account (an asset) and credit the income account to increase income. For Unearned Income, debit the income account to reduce income and credit the unearned income account (a liability). After journalising, the entries are posted to their respective ledgers and the adjusted balances of the nominal accounts feed into the adjusted trial balance.

Adjustments affect two statements. In the Income Statement, prepaid expenses are deducted from that year's expense while accrued expenses are added to the expense; accrued income is added to income while unearned income is deducted from income. In the Statement of Financial Position (Penyata Kedudukan Kewangan), prepaid expenses and accrued income are reported as current assets, while accrued expenses and unearned income are reported as current liabilities. If these adjustments are left out or made wrongly, the net profit and the financial position of the business will be misstated.

For this standard, students should practise identifying whether an item is an income or an expense adjustment, and whether it increases or decreases the original figure. An effective technique is to build a 'T-account' for the item to see the balance brought down (b/d) that becomes an asset or liability on the balance date. A firm grasp of the accrual and matching concepts helps students answer adjustment questions even when the question format changes.

Worked examples

Practice

Exam tips

Key terms

Prepaid Expense (Belanja Prabayar)

An expense already paid for a future period; reported as a current asset on the balance date.

Accrued Expense (Belanja Belum Bayar)

An expense already incurred in the current period but not yet paid; reported as a current liability.

Accrued Income (Hasil Belum Terima)

Income already earned in the current period but not yet received in cash; reported as a current asset.

Unearned Income (Hasil Belum Terperoleh)

Income already received in cash but not yet earned; reported as a current liability.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

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