Adjustments to financial statements students acca global acca global gas vs electric stove cost

The most important point, which must be understood at the outset, is that all these adjustments have an impact on both the statement of profit or loss and in the statement of financial position. If the trial balance balances, your answer must balance, and therefore any changes you make to the trial balance must balance – every debit adjustment should have an equal and opposite credit adjustment. Having said that, it is more important to complete the question within the time allowed, without spending time on getting the statement of financial position to balance. INVENTORY

This is a fairly familiar adjustment. The cost of sales consists of opening inventory plus purchases, minus closing inventory. The closing inventory is thus a deduction (credit) in the statement of profit or loss, and a current asset (debit) in the statement of financial position.

The ledger account behind the adjustment causes problems for some candidates. This is how the inventory/stock account will look at the time the trial balance is being prepared. The entry is the transfer from the statement of profit or loss for the closing inventory of the previous year (figures invented):

There will sometimes be a requirement to adjust inventory to allow for damaged or slow-moving items. IAS 2, Inventories require inventories to be included at the lower of cost and net realisable value. It may therefore be necessary to reduce the inventory figure to reflect a net realisable value below cost for the items detailed. You should calculate the closing inventory figure before you process the adjustment. Writing down inventory to net realisable value will increase cost of sales and reduce inventory on the statement of financial position. Using the above, if inventory costing $10,000 is expected to sell for $5,000, you would reduce closing inventory to $45,000 – 5,000 = $40,000. Cost of sales now becomes $278,500. ACCRUALS AND PREPAYMENTS

The statement of profit or loss has to include the expenses relating to the period, whether or not they have been paid. The figures in the trial balance will usually be the amounts paid in the period, and they need adjusting for outstanding amounts and amounts paid which relate to other periods to obtain the charge in the statement of profit or loss.

Unpaid balances relating to the period should be included in the statement of financial position as current liabilities. If the expense has been paid in advance, the amount prepaid is included in the statement of financial position as a current asset. In the statement of profit or loss, the total expense is needed with a working showing the detail. Don’t show two figures in the outer column for the same expense heading. For example, the trial balance shows:

Candidates are expected to note that only half the loan interest has been paid, and accrue for the other $4,000. Examiners generally indicate in some way that the loan stock/debentures have been in issue for the whole year if they want this adjustment to be made. Second, the interest is a finance cost in the statement of profit or loss ($8,000) and the accrued interest ($4,000) is a current liability and the loan stock/debentures ($100,000) are a non-current liability. Present them appropriately and don’t combine them. DEPRECIATION

Depreciation is a slightly more complex adjustment. Depreciation spreads the cost of non-current/ over the assets’ useful lives, so that a charge against profit appears in the statement of profit or loss. This charge, each year that the asset is used by the business, should match the economic benefits that the assets use has generated for the business. If an asset will help the business create revenue for 5 years, then the cost of the asset is spread over the same five years – depreciation is the application of the accruals concept.

Some businesses adopt a policy of charging a full year’s depreciation in the year the asset was purchased, and none in the year of its sale. Others take proportionate depreciation for the number of months of ownership of the asset in the year. The first requirement, therefore, is to read the question carefully to find out what has to be done for each non-current asset.

The current year’s depreciation charge is calculated and appears as an expense. Do not include the accumulated depreciation. The accumulated depreciation is the total depreciation charged during an asset’s life (assuming no revaluation) and as such previous depreciation will have been charged against profits in earlier periods.

The statement of financial position shows the cost, accumulated depreciation (the figure in the trial balance brought forward from the end of the previous accounting period, plus the current year’s charge from the statement of profit or loss), and the carrying amount. The easiest way to present this is as a table, as follows (figures invented):

A third account is required to handle disposals. When a non-current asset is sold, the cost and accumulated depreciation relating to the asset are transferred out of the accounts to a disposal account. The proceeds of sale are credited to the account, and the balance on the account is then the profit or loss on the sale, to be transferred to the statement of profit or loss. You can check your calculation of profit or loss on disposal quickly by taking the proceeds of sale less the carrying amount (cost – accumulated depreciation) of the asset at the date of sale. BAD DEBTS AND ALLOWANCE FOR RECEIVABLES/DEBTORS

Writing off a bad debt means taking a customer’s balance in the receivables ledger and transferring it to the statement of profit or loss as an expense, because the balance has proved irrecoverable. There are two separate exam possibilities here:

• bad debts appear as an item in the trial balance. This means the debts have already been written off. In other words, receivables have already been reduced. All that is necessary is to put the figure in the statement of profit or loss as an expense

• bad debts appear as an adjustment outside the trial balance. An adjustment to two figures are now needed. The amount goes into the statement of profit or loss as an expense (it may be added to administrative expenses or operating expenses) and is deducted from the receivables figure in the statement of financial position.

This allowance is set up in order to include a realistic value for receivables in the statement of financial position, without actually writing off the debt. The balance is left in the receivables ledger so that collection procedures continue, but the receivables in the statement of financial position are valued as if the amount is not to be recovered. The trial balance shows: