Chapter 6 (income) and Chapter 7 (expenses) introduce four year-end adjustments between them. Students mix them up because two are assets and two are liabilities. This grid pulls all four together — the key is when the cash moves:
| Cash moves EARLY (before earned / used) | Cash moves LATE (after earned / used) | |
|---|---|---|
| Income (Chapter 6) | Record as income received in advance → current liability (profit overstated if omitted) | Record as income receivable → current asset (profit understated if omitted) |
| Expense (Chapter 7) | Record as prepaid expense → current asset (profit understated if omitted) | Record as expense payable → current liability (profit overstated if omitted) |
How to read it:
- Cash early (received in advance / prepaid) — the business has not yet done its part, so the amount relates to next year.
- Cash late (receivable / payable) — the work is done and only the cash is outstanding, so it belongs to this year.
- Asset or liability? It flips with income vs expense: money the business will receive (or a benefit it has paid for) is an asset; money it must pay (or a service it still owes) is a liability.
The year-end entries (each reversed on the first day of the next financial period):
| Adjustment | Debit | Credit |
|---|---|---|
| Income received in advance | Income | Income received in advance |
| Income receivable | Income receivable | Income |
| Prepaid expense | Prepaid expense | Expense |
| Expense payable | Expense | Expense payable |