Adjustments and Their Effect on Financial

Statements:
Majority of the business enterprises are preparing their financial statements in statement
form. On this page effect of adjustment on income statement is discussed to meet the
requirements of modern business.

Outstanding Expenses or Accrued Expenses:

(a). If the outstanding expenses are non-recurring i.e., direct expenses:

Outstanding Expenses
Added to net purchases in cost of
Shown in the balance sheet under
goods sold schedule in income
the head of current liabilities
statement

(b). If the outstanding expenses are recurring i.e., operating expenses:

Outstanding Expenses
Deducted from gross income under the
Shown in the balance sheet under
head of operating expenses in income
the head of current liabilities
statement

Prepaid Expenses or Unexpired Expenses or Expenses Paid in

Advance:

Prepaid Expenses
Expenses expired are deducted from
Unexpired expenses are shown in
gross profit under the head of
the balance sheet under the head
operating expenses in income
of current assets
statement

Accrued Revenue or Revenue Receivable:

Accrued Revenue
Added to operating income under the
Accrued revenue is recorded as
head of other revenues in income
current asset in balance sheet
statement

Unearned Revenue or Revenue Received in Advance:

Unearned Revenue
revenue earned is added to operating Unearned revenue is shown in
income under the head other revenues balance sheet under the head of
in income statement current liabilities

Prepared by Mr martin Mfinanga -NIT

Depreciation of Assets:

Depreciation
Shown under the head of fixed
Deducted from gross income under the
assets in the balance sheet as
head operating expenses in income
deduction from the concerned
statement
assets

Note:

1. If depreciation expense is given on debit side of trial balance then it is recorded only in income statement
under the head of office and administration expenses.
2. If accumulated depreciation is given on credit side of trial balance then this balance is added in current
year's depreciation and total is deducted from concerned asset in balance sheet.

Interest on Capital:

Interest on Capital
Deducted from operating income under Shown on the liability side of
the head of financial and other balance sheet "as addition to
expenses in income statement capital"

Interest on Drawings:

Interest on Drawings
Added to operating income under the Added to drawings and total
head of other revenues in income drawings are deducted from capital
statement on liability side of balance sheet

Closing Inventory:

Closing Inventory
Deducted from cost of goods available Shown as current asset in balance
for sale in income statement sheet

Allowances for Uncollectible:

Allowances for Uncollectible

In selling expenses bad
debts/uncollectible are added to
allowance for uncollectible required
and from total balance existing
allowance for uncollectible is deducted
In balance sheet allowance for
uncollectible required is deducted
from accounts receivables

Prepared by Mr martin Mfinanga -NIT

QUESTIONS RELATING TO ADJUSTMENT OF FINANCIAL STATEMENT

1 The following trial balance was extracted from the books of R Giggs at the close of business
on 28 February 20X7.
Dr Cr
£ £
Purchases and sales 92,800 157,165
Cash at bank 4,100
Cash in hand 324
Capital account 1 March 20X6 11,400
Drawings 17,100
Office furniture 2,900
Rent 3,400
Wages and salaries 31,400
Discounts 820 160
Debtors and creditors 12,316 5,245
Stock 1 March 20X6 4,120
Provision for doubtful debts 1 March 20X6 405
Delivery van 3,750
Van running costs 615
Bad debts written off 730
174,375 174,375
Notes:
(a) Stock 28 February 20X7 £2,400.
(b) Wages and salaries accrued at 28 February 20X7 £340.
(c) Rent prepaid at 28 February 20X7 £230.
(d) Van running costs owing at 28 February 20X7 £72.
(e) Increase the provision for doubtful debts by £91.
(f ) Provide for depreciation as follows: Office furniture £380; Delivery van £1,250.
Required:
Draw up the trading and profit and loss account for the year ending 28 February 20X7 together
with a Statement of financial position as on 28 February 20X7.

2. The trial balance for a small business at 31 August 20X8 is as follows:

£ £
Stock 1 September 20X7 8,200
Purchases and Sales 26,000 40,900
Rent 4,400
Business rates 1,600
Sundry expenses 340
Motor vehicle at cost 9,000
Debtors and creditors 1,160 2,100
Bank 1,500
Provision for depreciation on motor vehicle 1,200
Capital at 1 September 20X7 19,700
Drawings 11,700
63,900 63,900
At 31 August 20X8 there was:
a) Stock valued at cost prices £9,100
b) Accrued rent of £400
c) Prepaid business rates of £300
d) The motor vehicle is to be depreciated at 20% of cost
Required:
A trading profit and loss account for the year ending 31 August 20X8, together with a Statement of financial position
as at that date.

Prepared by Mr martin Mfinanga -NIT

3 This question also relates to extended trial balances From the following trial balance of John Brown, store owner, prepare a
trading account and profit and loss account for the year ended 31 December 20X7, and a Statement of financial position as at that
date, taking into consideration the adjustments shown below:
Trial Balance as at 31 December 20X7
Dr Cr
£ £
Sales 400,000
Purchases 350,000
Sales returns 5,000
Purchases returns 6,200
Opening stock at 1 January 20X7 100,000
Provision for doubtful debts 800
Wages and salaries 30,000
Rates 6,000
Telephone 1,000
Shop fittings at cost 40,000
Van at cost 30,000
Debtors and creditors 9,800 7,000
Bad debts 200
Capital 179,000
Bank balance 3,000
Drawings 18,000
593,000 593,000
(i) Closing stock at 31 December 20X7 £120,000.
(ii) Accrued wages £5,000.
(iii) Rates prepaid £500.
(iv) The provision for doubtful debts to be increased to 10 per cent of debtors.
(v) Telephone account outstanding £220.
(vi) Depreciate shop fittings at 10 per cent per annum, and van at 20 per cent per annum, on cost.

4 J Wright, a sole trader, extracted the following trial balance from his books at the close
of business on 31 March 20X9:
Dr Cr
££
Purchases and sales 61,420 127,245
Stock 1 April 20X8 7,940
Capital 1 April 20X8 25,200
Bank overdraft 2,490
Cash 140
Discounts 2,480 62
Returns inwards 3,486
Returns outwards 1,356
Carriage outwards 3,210
Rent and insurance 8,870
Provision for doubtful debts 630
Fixtures and fittings 1,900
Van 5,600
Debtors and creditors 12,418 11,400
Drawings 21,400
Wages and salaries 39,200
General office expenses 319
168,383 168,383
Notes:
(a) Stock 31 March 20X9 £6,805.
(b) Wages and salaries accrued at 31 March 20X9 £3,500; Office expenses owing £16.
(c) Rent prepaid 31 March 20X9 £600.
(d) Increase the provision for doubtful debts by £110 to £740.
(e) Provide for depreciation as follows: Fixtures and fittings £190; Van £1,400.

Required:
Prepare the trading and profit and loss accounts for the year ended 31 March 20X9 together with a
Statement of financial position as at that date.

Prepared by Mr martin Mfinanga -NIT

5. The following trial balance has been extracted from the ledger of Mr Yousef, a sole
trader. Trial Balance as at 31 May 20X6
Dr Cr
£ £
Sales 138,078
Purchases 82,350
Carriage 5,144
Drawings 7,800
Rent, rates and insurance 6,622
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Provision for doubtful debts 130
Debtors 12,120
Creditors 6,471
Cash in hand 177
Cash at bank 1,002
Stock as at 1 June 20X5 11,927
Equipment at cost 58,000
accumulated depreciation 19,000
Capital 53,091
216,770 216,770
The following additional information as at 31 May 20X6 is available:
(a) Rent is accrued by £210.
(b) Rates have been prepaid by £880.
(c) £2,211 of carriage represents carriage inwards on purchases.
(d) Equipment is to be depreciated at 15% per annum using the straight line method.
(e) The provision for doubtful debts to be increased by £40.
(f ) Stock at the close of business has been valued at £13,551.
Required:
Prepare a trading and profit and loss account for the year ended 31 May 20X6 and a Statement of financial position
as at that date.

6. Mr Chai has been trading for some years as a wine merchant. The following list of
balances has been extracted from his ledger as at 30 April 20X7, the end of his most recent
financial year.
£
Capital 83,887
Sales 259,870
Trade creditors 19,840
Returns out 13,407
Provision for doubtful debts 512
Discounts allowed 2,306
Discounts received 1,750
Purchases 135,680
Returns inwards 5,624
Carriage outwards 4,562
Drawings 18,440
Carriage inwards 11,830
Rent, rates and insurance 25,973
Heating and lighting 11,010
Postage, stationery and telephone 2,410
Advertising 5,980
Salaries and wages 38,521
Bad debts 2,008
Cash in hand 534
Cash at bank 4,440
Stock as at 1 May 20X6 15,654
Trade debtors 24,500
Fixtures and fittings – at cost 120,740
Provision for depreciation on fixtures and fittings – as at 30 April 20X7 63,020
Depreciation 12,074

The following additional information as at 30 April 20X7 is available:

(a) Stock at the close of business was valued at £17,750.
(b) Insurances have been prepaid by £1,120.
(c) Heating and lighting is accrued by £1,360.
(d) Rates have been prepaid by £5,435.
(e) The provision for doubtful debts is to be adjusted so that it is 3% of trade debtors.

Prepared by Mr martin Mfinanga -NIT

Required:
Prepare Mr Chai’s trading and profit and loss account for the year ended 30 April 20X7 and a Statement of financial position as at
that date.

THANKS YOU

Prepared by Mr martin Mfinanga -NIT