Adjustments to Financial Statements

Exam code: 7707

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Adjustments to financial statements

What are adjustments to financial statements?

A trial balance is prepared at the end of the financial period
The trial balance is used to prepare the financial statements
However, there may be additional notes after the trial balance has been prepared
Common items contained in additional notes are:
- Valuation of the closing inventory
- Goods taken for own use
- Depreciation information for the year
- Accruals and prepayments of expenses
- Accruals and prepayments of income
- Irrecoverable debts
  - Written off or recovered
- Information about the provision for doubtful debts

How do I make adjustments with the additional notes?

Each additional note is used twice in the financial statements
- It can adjust a figure stated in the trial balance
- Or it can represent a new account that is not in the trial balance

	Income Statement	Statement of Financial Position
Closing inventory	Subtract this value from the purchases	Include under current assets
Goods taken for own use	Subtract this value from the purchases	Add to the drawings balance
Depreciation for the year	Include the depreciation for the year as an expense	Add the year’s depreciation to the provision for depreciation which appears under non-current assets
Accrued expense	Add the amount to the relevant expense	Include under current liabilities labelled as other payables
Prepaid expense	Subtract the amount from the relevant expense	Include under current assets labelled as other receivables
Accrued income	Add the amount to the relevant income	Include under current assets labelled as other receivables
Prepaid income	Subtract the amount from the relevant income	Include under current liabilities labelled as other payables
Irrecoverable debts written off	Include as an expense labelled as irrecoverable debts	Subtract from the trade receivables amount
Recovery of debts written off	Include as other income labelled as debts recovered	Add to the bank or cash amount
Increase in the provision for doubtful debts	Include the increase as an expense labelled as provision for doubtful debts	Subtract the total provision for doubtful debts from the trade receivables amount
Decrease in the provision for doubtful debts	Include the decrease as other income labelled as provision for doubtful debts	Subtract the total provision for doubtful debts from the trade receivables amount

Worked example

Junaid provides a trial balance of his accounts at 31 December 2023.

Junaid Trial Balance at 31 December 2023
	Debit $	Credit $
Revenue		116 400
Purchases	74 000
Equipment at cost	30 000
Provision for depreciation of equipment		10 800
Insurance	2 500
Rent received		5 800
Trade receivables	25 000
Provision for doubtful debts		1 500
Trade payables		14 000
Bank	12 000
Inventory at 1 January 2023	18 000
Drawings	8 000
Capital at 1 January 2023		21 000
	169 500	169 500

Additional information

Inventory at 31 December 2023 was $14 000.
Depreciation is to be charged on equipment at 20% per annum using the reducing balance method.
Prepaid insurance at 31 December 2023 was $400.
$300 rent was still owed to Junaid at 31 December 2023.
Junaid had taken $500 goods for personal use. No entries were made in the ledger accounts.
Junaid was unable to contact a credit customer, so their $1 000 was to be written off as irrecoverable debt.
The provision for doubtful debts is to be maintained at 5% of trade receivables.

(a) Prepare the income statement for Junaid for the year ended 31 December 2023.

(b) Prepare the statement of financial position for Junaid at 31 December 2023.

Answer:

Deal with each additional item

Item 1 - closing inventory

Subtract the closing inventory from the purchases on the income statement
List the closing inventory as a current asset on the statement of financial position

Item 2 - depreciation

Calculate the net book value before charging this year’s depreciation

$30 000 - $10 800 = $19 200

Calculate this year’s depreciation

20% × $19 200 = $3 840

List the year’s depreciation as an expense on the income statement
Add the depreciation to the provision for depreciation

Item 3 - prepaid expense

Subtract the prepayment from the insurance and list as an expense on the income statement
List the prepayment of an expense (other receivables) as a current asset on the statement of financial position

Item 4 - accrued income

Add the accrual to the rent received and list as other income on the income statement
List the accrual of income (other receivables) as a current asset on the statement of financial position

Item 5 - goods for own use

Subtract these goods from the purchases on the income statement
Add this amount to the drawings

Item 6 - irrecoverable debts

Subtract the balance from the trade receivables
List the irrecoverable debts as an expense on the income statement

Item 7 - provision for doubtful debts

Calculate the provision for doubtful debts at 31 December 2023

Trade receivables is $25 000 - $1 000 = $24 000

5% × $24 000 = $1 200

Calculate the change from the previous year

$1 500 - $1 200 = $300 decrease

List the decrease an other income on the income statement
Subtract the new provision from the trade receivables on the statement of financial position

You can annotate the figures in the trial balance:

	Debit $	Credit $
Revenue		116 400
Purchases - closing inventory - goods for own use	74 000 -14 000 - 500 = 59 500
Equipment at cost	30 000
Provision for depreciation of equipment + depreciation for the year		10 800 + 3 840 = 14 640
Insurance - prepaid insurance	2 500 - 400 = 2 100
Rent received + accrued rent owed		5 800 + 300 = 6 100
Trade receivables - irrecoverable debts	25 000 - 1 000 = 24 000
Provision for doubtful debts - decrease in provision		1 500 - 300 = 1 200
Trade payables		14 000
Bank	12 000
Inventory at 1 January 2023	18 000
Drawings + goods for own use	8 000 + 500 = 8 500
Capital at 1 January 2023		21 000
Closing inventory	14 000
Depreciation	3 840
Other receivables (prepaid insurance + accrued rent)	400 + 300 = 700
Irrecoverable debts	1 000
Decrease in provision for doubtful debts		300

(a)

Prepare the income statement using the usual format

Junaid Income Statement for the year ended 31 December 2023
	$	$	$
Revenue			116 400
Less: Cost of sales
Opening inventory		18 000
Purchases	74 000
Less: Goods for own use	500	73 500
		91 500
Less: Closing inventory		14 000	77 500
Gross profit			38 900
Add: Other income
Rent received			6 100
Provision for doubtful debts			300
			45 300
Less: Expenses
Insurance		2 100
Irrecoverable debts		1 000
Depreciation of equipment		3 840	6 940
Profit for the year			38 360

(b)

Prepare the statement of financial position using the usual format

Junaid Statement of Financial Position at 31 December 2023
	$	$	$
Non-current assets	Cost	Provision for depreciation	Net book value
Equipment	30 000	14 640	15 360
Current assets
Inventory		14 000
Trade receivables	24 000
Less: Provision for doubtful debts	1 200	22 800
Other receivables		700
Bank		12 000	49 500
Total assets			64 860
Capital and liabilities
Capital
Opening capital			21 000
Add: Profit for the year			38 360
			59 360
Less: Drawings			8 500
			50 860
Current liabilities
Trade payables			14 000
Total capital and liabilities			64 860