Adjustments to Sole Trader’s

financial statements
Income Statement
⚫ Basic formula

1 Cost of sales = Inventory + Purchases- Inventory

start of year end of year

2 Gross Profit = Sales – cost of sales(cost of goods sold)

3 Net Profit= Gross profit - Expenses

1 Depreciation
⚫ 1Income statement
⚫ Add to expenses
⚫ Depreciation on Non Current Assets 8700

⚫2 Statement of financial position

⚫ Non Current Assets
⚫ Equipment 58000
⚫ Less depreciation(trial balance+ this year)(19000+8700) 30300
2 Bad debts and Provision
⚫ 1Income statement
⚫ Add to other income
⚫ Decrease in provision for bad debts
⚫ Less expenses
⚫ Bad debts 730
⚫ Increase in provision for bad debts 91
⚫ 2 statement of financial position
⚫ Current Assets
⚫ Trade Receivables 12316
⚫ Less provision for bad debts (405+91)
3 Accrued Expenses(expenses due but not paid)
⚫ 1 Income statement
⚫ Add to expenses
⚫ Wages and salaries paid 12000
⚫ Add accrued 3000 15000

⚫2 Statement of financial position

⚫ Current liabilities
⚫ As other payables / accrued wages 3000
Adjusting entries
⚫ Wages 3000
⚫ Accrued wages 3000
⚫ Prepaid rent 2000
⚫ Rent a/c 2000
⚫ Commission received 5000
⚫ unearned commission 5000
4 Prepaid expenses (expenses
paid in advance for next year)
⚫ 1 Income statement
⚫ Deduct from expenses
⚫ Rent 14000
⚫ Less prepaid (2000) 12000
⚫ 2 Statement of financial position
⚫ Shown in current assets
⚫ as other receivables/prepaid rent 2000
⚫
Income received in advance
Unearned income

⚫ Accrued Income
⚫ Income earned but not received
⚫
⚫ Accrued income
⚫ income
5 Loan and loan interest
⚫ Income statement
⚫ Add to expenses
⚫ Loan interest (10000+6000) =16000

⚫2 statement of financial position

⚫ Non current liabilities
⚫ 8% bank Loan $ 200000
6 Error of omission
⚫ 1goods costing $ 6500 taken by the owner has not been
recorded in the books at all
⚫ Drawings 6500
⚫ purchases 6500
⚫ (increase drawings reduce purchases)
⚫ 2Purchase invoice $4300 have not been recorded in the
books at all
⚫ Purchase 4300
⚫ Trade payables 4300
⚫ (Increase purchases and trade payables)
7 Error of principles
⚫ Purchase of motor van $5000 has been Dr to motor
expenses a/c
⚫ Motor van 5000
⚫ motor expenses 5000
⚫ Increases the motor van and reduce motor expenses
 Name
Income statement
for the year ended December31 2019
$ $
Sales
Less sales return
Less cost of goods sold
Op Inventory
Add purchase - goods taken for own use (25000-500) 24500
Less goods taken by the owner
Less return outward
Add carriage on purchases/carriage inward 2211
Less closing inventory
Gross profit
Add other income
Add other income
Discount received
Rent received (12000+3000) add accrued – prepaid RR 15000
Decrease in provision for bad debts
Profit on disposal
Less expenses
Depreciation on NCA 8700
Carriage on sales/ distribution cost 2933
Discount allowed
Bad debts 877
Increase in provision for bad debts 40
Loan interest Plus accrued
Wages and salaries add Accrued (36000+4000) 40000
Insurance less prepaid (14000-2000) 12000
Profit for the year (net profit)
⚫ Ledger a/c for expenses (rent and rates a/c)

Prepaid rent b/d 1900 Accrued rates b/d

Bank 27100 I/S (balancing fig) 24600
Accrued rates c/d Prepaid rent c/d ? 4400

⚫ Ledger a/c for revenue

Accrued b/d jan1 500 Prepaid b/d 950

I/S (balancing fig) 3810 bank 3600
Prepaid c/d 720 Accrued c/d dec 31 480
Write up the rent received a/c
⚫ Jan I Accrued rent received $ 500
⚫ Prepaid rent received $950

⚫ During the year received rent by cash $ 3600

⚫ Dec 31 Accrued rent received $ 480

⚫ prepaid rent received $ 720

⚫ Calculate the rent receive transfer to I/S