Adjustments to Financial Statements (Cambridge International IGCSE Accounting)
Exam board Cambridge International · IGCSEUpdated 2026-01-07
Adjustments to financial statements
What are adjustments to financial statements?
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A trial balance is prepared at the end of the financial period
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The trial balance is used to prepare the financial statements
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However, there may be additional notes after the trial balance has been prepared
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Common items contained in additional notes are:
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Valuation of the closing inventory
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Goods taken for own use
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Depreciation information for the year
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Accruals and prepayments of expenses
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Accruals and prepayments of income
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Irrecoverable debts
- Written off or recovered
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Information about the provision for doubtful debts
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How do I make adjustments with the additional notes?
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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 |
Exam Hint 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 2023Debit
$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 use74 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
Final answer: Junaid
Final answer: Income Statement for the year ended 31 December 2023Final answer: $** Final answer: $ Final answer: $ Final answer: Revenue Final answer: 116 400 Final answer: Less: Cost of sales Final answer:** Opening inventory ** Final answer: 18 000 Final answer:** Purchases ** Final answer: 74 000 Final answer:** Less: Goods for own use ** Final answer: 500 Final answer: 73 500 Final answer: 91 500 Final answer:** Less: Closing inventory ** Final answer: 14 000 Final answer: 77 500 Final answer: Gross profit Final answer: 38 900 Final answer: Add: Other income Final answer: Rent received Final answer: 6 100 Final answer: Provision for doubtful debts Final answer: 300 Final answer: 45 300 Final answer: Less: Expenses Final answer:** Insurance ** Final answer: 2 100 Final answer:** Irrecoverable debts ** Final answer: 1 000 Final answer:** Depreciation of equipment ** Final answer: 3 840 Final answer: 6 940 Final answer:** Profit for the year ** Final answer: 38 360 **(b) **
Prepare the statement of financial position using the usual format
Final answer: Junaid
Final answer: Statement of Financial Position at 31 December 2023Final answer:****$ Final answer: **$ Final answer: $ Final answer: Non-current assets Final answer: Cost Final answer: Provision for depreciation Final answer: Net book value Final answer: Equipment Final answer: 30 000 Final answer: 14 640 Final answer: 15 360 Final answer: Current assets Final answer: Inventory Final answer: 14 000 Final answer: Trade receivables Final answer: 24 000 Final answer: Less: Provision for doubtful debts Final answer: 1 200 Final answer: 22 800 Final answer: Other receivables Final answer: 700 Final answer: Bank Final answer: 12 000 Final answer: 49 500 Final answer: Total assets Final answer: 64 860 Final answer: Capital and liabilities Final answer: Capital Final answer: Opening capital Final answer: 21 000 Final answer: Add: Profit for the year Final answer: 38 360 Final answer: 59 360 Final answer: Less: Drawings Final answer: 8 500 Final answer: 50 860 Final answer: Current liabilities Final answer: Trade payables Final answer: 14 000 Final answer: Total capital and liabilities Final answer: 64 860
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