Summary of Adjustments (Edexcel IGCSE Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
Summary of Adjustments
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
Information about the provision for irrecoverable 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 accumulated 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 irrecoverable debts | Include the increase as an expense labelled as provision for irrecoverable debts | Subtract the total provision for irrecoverable debts from the trade receivables amount |
Decrease in the provision for irrecoverable debts | Include the decrease as other income labelled as provision for irrecoverable debts | Subtract the total provision for irrecoverable debts from the trade receivables amount |
Examiner Tips and Tricks
If you are given a trial balance then it can be helpful to annotate the trial balance with the adjustments before preparing the financial statements.
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 irrecoverable 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 irrecoverable 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 drawing
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 irrecoverable debts
Calculate the provision for irrecoverable 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 | 74 000 | |
Closing inventory | -14 000 | |
Goods for own use | -500 | |
Equipment at cost | 30 000 | |
Provision for depreciation of equipment | 10 800 + 3 840 = 14 640 | |
Insurance | 2 500 - 400 = 2 100 | |
Rent received | 5 800 + 300 = 6 100 | |
Trade receivables | 25 000 - 1 000 = 24 000 | |
Provision for irrecoverable debts | 1 500 - 300 = 1 200 | |
Trade payables | 14 000 | |
Bank | 12 000 | |
Inventory at 1 January 2023 | 18 000 | |
Drawings | 8 000 + 500 = 8 500 | |
Capital at 1 January 2023 | 21 000 | |
Closing inventory | 14 000 | |
Depreciation | 3 840 | |
Other receivables | 400 + 300 = 700 | |
Irrecoverable debts | 1 000 | |
Decrease in provision for irrecoverable debts | 300 |
(a) Prepare the income statement using the usual format.
Junaid Income Statement for the year ended 31 December 2023 | |||
$ | $ | $ | |
Revenue | 116 400 | ||
Cost of sales | |||
Opening inventory | 18 000 | ||
Purchases | 74 000 | ||
Goods for own use | (500) | ||
Closing inventory | (14 000) | ||
(77 500) | |||
Gross profit | 38 900 | ||
Other income | |||
Rent received | 6 100 | ||
Provision for irrecoverable debts | 300 | ||
6 400 | |||
45 300 | |||
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 | Accumulated depreciation | Carrying value |
Equipment | 30 000 | (14 640) | 15 360 |
Current assets | |||
Inventory | 14 000 | ||
Trade receivables | 24 000 | ||
Provision for irrecoverable debts | (1 200) | 22 800 | |
Other receivables | 700 | ||
Bank | 12 000 | ||
49 500 | |||
Total assets | 64 860 | ||
Equity and liabilities | |||
Equity | |||
Opening equity | 21 000 | ||
Profit for the year | 38 360 | ||
Drawings | (8 500) | ||
Total equity | 50 860 | ||
Current liabilities | |||
Trade payables | 14 000 | ||
Total equity and liabilities | 64 860 |
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