Adjustments to Financial Statements (Cambridge (CIE) O Level Accounting)

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.

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

Additional information

1. Inventory at 31 December 2023 was $14 000.

2. Depreciation is to be charged on equipment at 20% per annum using the reducing balance method.

3. Prepaid insurance at 31 December 2023 was $400.

4. $300 rent was still owed to Junaid at 31 December 2023.

5. Junaid had taken $500 goods for personal use. No entries were made in the ledger accounts.

6. Junaid was unable to contact a credit customer, so their $1 000 was to be written off as irrecoverable debt.

7. 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 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 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:

(a) Prepare the income statement using the usual format.

(b) Prepare the statement of financial position using the usual format.