reference
Financial Statement with Adjustments
accounting notes
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- 2 Apr 2026
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- 15 min
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Adjustments for provision for depreciation
How do I record depreciation on the financial statements?
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Calculate the depreciation charge for the year
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The depreciation charge for the year is shown on the income statement
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The depreciation charge for the year is added to the provision for depreciation to find the total depreciation to date
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The statement of financial position shows:
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The cost of the non-current assets
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The accumulated depreciation to date
- Including the charge for the current year
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The carrying value
- The cost minus the depreciation
-
Which accounting concepts are used when recording depreciation?
- The following accounting concepts are used when recording depreciation:
| Concept | Reason |
|---|---|
| Accruals | The expenditure of the non-current asset is matched to the accounting periods where it is used |
| Consistency | The selected method for charging depreciation should be used for each accounting period so that financial statements can be accurately compared |
Worked Example
Carlita owns a restaurant in her local area. Carlita’s financial year end is 30 April.
On 1 May 2022, she bought furniture costing $15 000 and paid for it by cheque. Carlita’s policy for the depreciation of furniture is to use the reducing balance method of depreciation at 20% per annum. Carlita charges depreciation in the year of purchase.
(a) Prepare an extract from the income statement for the year ended 30 April 2023 and an extract of the non-current assets section from the statement of financial position at 30 April 2023.
(b) Prepare an extract from the income statement for the year ended 30 April 2024 and an extract of the non-current assets section from the statement of financial position at 30 April 2024.
Answer
Part (a)
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Calculate the depreciation charge for the first year by finding 20% of the carrying value
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In the first year, the carrying value and cost are the same
- 20% ✕ $15 000 = $3 000
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Calculate the carrying value at the end of the first year
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Subtract the total depreciation from the cost
- $15 000 - $3 000 = $12 000
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Prepare the extracts
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Only include the year’s depreciation on the income statement
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Include the cost, total depreciation and carrying value on the statement of financial position
-
| Carlita Extract from the Income Statement for the year ended 30 April 2023 | |
| $ | |
| Expenses | |
| Depreciation of furniture | (3 000) |
| Carlita Extract from the Statement of Financial Position at 30 April 2023 | |||
| $ | $ | $ | |
| Non-current assets | Cost | Accumulated depreciation | Carrying value |
| Furniture | 15 000 | (3 000) | 12 000 |
Part (b)
-
Calculate the depreciation charge for the second year by finding 20% of the carrying value
- 20% ✕ $12 000 = $2 400
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Find the total depreciation to date
- $3 000 + $2 400 = $5 400
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Calculate the carrying value at the end of the second year
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Subtract the total depreciation from the cost
- $15 000 - $5 400 = $9 600
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Prepare the extracts
-
Only include the year’s depreciation on the income statement
-
Include the cost, total depreciation and carrying value on the statement of financial position
-
| Carlita Income Statement (extract) for the year ended 30 April 2024 | |
| $ | |
| Expenses | |
| Depreciation of furniture | (2 400) |
| Carlita Statement of Financial Position (extract) at 30 April 2024 | |||
| $ | $ | $ | |
| Non-current assets | Cost | Accumulated depreciation | Carrying value |
| Furniture | 15 000 | (5 400) | 9 600 |
Adjustments for provisions for irrecoverable debts
How do I record the provision for irrecoverable debts on the financial statements?
-
Calculate the provision for irrecoverable debts at the end of the current year
-
Calculate the difference between:
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The provision for irrecoverable debts at the start of the year
- This value will be on the trial balance
-
And the provision for irrecoverable debts at the end of the year
- This is the value that you need to calculate
-
-
The difference is the value that is stated on the income statement
-
If the provision for irrecoverable debts increases, the increase is listed with the expenses
- Label it provision for irrecoverable debts
-
If the provision for irrecoverable debts decreases, the decrease is listed with the other income
- Label it provision for irrecoverable debts
-
-
Record the new balance for the provision for irrecoverable debts on the statement of financial position
-
List it underneath trade receivables in the current assets section
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Subtract the provision from the value for trade receivables
-
Which accounting concepts are used when recording the provision for irrecoverable debts?
- The following accounting concepts are used when recording the provision for irrecoverable debts:
| Concept | Reason |
|---|---|
| Accruals | The likely expense of future irrecoverable debts is matched to the accounting period where the sales were made |
| Prudence | The likely irrecoverable debts should be subtracted from the profit for the year and the trade receivables so that the profits and the assets are not overstated |
Worked Example
Clara starts trading on 1 January 2022. At 31 December 2022, the trade receivables balance is $24 000. Clara sets up a provision for irrecoverable debts which is to be maintained at 4% of trade receivables.
(a) Prepare an extract from the income statement for the year ended 31 December 2022 and an extract of the current assets section from the statement of financial position at 31 December 2022.
(b) At 31 December 2023, the trade receivables balance is $22 000. Prepare an extract from the income statement for the year ended 31 December 2023.
Answer
Part (a)
-
Calculate the provision for irrecoverable debts
- 4% ✕ $24 000 = $960
-
This is an increase from $0
- It will appear as an expense on the income statement
| Clara Income Statement (extract) for the year ended 31 December 2022 | |
| $ | |
| Expenses | |
| Provision for irrecoverable debts | (960) |
| Clara Statement of Financial Position (extract) at 31 December 2022 | ||
| Current Assets | $ | $ |
| Trade receivable | 24 000 | |
| Provision for irrecoverable debts | (960) | 23 040 |
Part (b)
-
Calculate the new provision for irrecoverable debts
- 4% ✕ $22 000 = $880
-
Calculate the difference from the previous provision for irrecoverable debts
- $960 - $880 = $80
-
This is a decrease
- It will appear as other income on the income statement
| Clara Income Statement (extract) for the year ended 31 December 2023 | |
| $ | |
| Other income | |
| Provision for irrecoverable debts |
Adjustments for accrued & prepaid expenses
How do I record accruals and prepayments of expenses on the financial statements?
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Calculate the total amount that is due for the current year
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Accrued expenses are amounts which remain unpaid at the end of the accounting period
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Prepaid expenses are amounts that are paid in the current accounting period but relate to a future accounting period
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The total amount due for the year is the value included on the income statement
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If an expense has an accrual then add that value to the balance of the account
-
If an expense has a prepayment then subtract that value from the balance of the account
-
-
The amounts of the accruals or prepayments are stated on the statement of financial position
-
The amount of an expense that is accrued is treated as a current liability
- Label it as other payables
-
The amount of an expense that is prepaid is treated as a current asset
- Label it as other receivables
-
Examiner Tips and Tricks
To help remember whether an accrual or a prepayment of an expense is an asset or a liability, consider whether the business still owes money. If it does then it is a liability.
Examiner Tips and Tricks
Where there are several accrued expenses, it is usual to show them all added as one figure on the statement of financial position called other payables under current liabilities. Similarly, several prepaid expenses are added together as one figure called other receivables under current assets.
Worked Example
Jenny runs a garage and her financial year ends 31 December 2023.
Jenny receives the electricity bill for her garage at the end of each month. The charge is $250 per month and Jenny pays by cheque on the 5th of the following month. At 31 December 2023, Jenny has not yet paid the bill for December.
Jenny pays insurance, $600, every six months. The payment is made in advance of six months. At 31 December 2023, Jenny has paid in advance for the following three months.
Prepare extracts of the financial statements to show how the electricity and insurance are treated.
Answer
Electricity:
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Calculate the amount due for the financial year
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12 ✕ $250 = $3 000
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This is the amount that will be stated on the income statement even though not all of it has been paid
-
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Identify the amount still owed for December
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One month’s bill of $250
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This will be listed as a current liability on the statement of financial position
-
Insurance:
-
Calculate the amount due for the financial year
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$600 ÷ 6 = $100 per month
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12 ✕ $100 = $1 200
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This is the amount that will be stated on the income statement even though more has been paid
-
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Identify the amount that has been paid in advance
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Three months: 3 ✕ $100 = $300
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This will be listed as a current asset on the statement of financial position
-
| Jenny Income Statement (extract) for the year ended 31 December 2023 | ||
| Expenses | $ | $ |
| Electricity | 3 000 | |
| Insurance | 1 200 | |
| (4 200) |
| Jenny Statement of Financial Position (extract) at 31 December 2023 | |
| $ | |
| Current assets | |
| Other receivables | 300 |
| Current liabilities | |
| Other payables | 250 |
Adjustments for accrued & prepaid income
How do I record accruals and prepayments of income on the financial statements?
-
Calculate the total amount that is due for the current year
-
Accrued income is an amount which has not yet been received at the end of the accounting period
-
Prepaid income is an amount that is received in the current accounting period but relates to a future accounting period
-
The total amount due for the year is the value included on the income statement
-
If an income has an accrual then add that value to the balance of the account
-
If an income has a prepayment then subtract that value from the balance of the account
-
-
The amounts of the accruals or prepayments are stated on the statement of financial position
-
The amount of an income that is accrued is treated as a current asset
- Label it as other receivables
-
The amount of an income that is prepaid is treated as a current liability
- Label it as other payables
-
Examiner Tips and Tricks
To help remember whether an accrual or a prepayment of income is an asset or a liability, consider whether the business is still owed income. If it is then it is an asset.
Examiner Tips and Tricks
Where there are several accrued incomes, it is usual to show them all added as one figure on the statement of financial position called other receivables under current assets. Similarly, several prepaid incomes are added together as one figure called other payables under current liabilities.
Worked Example
Savio is a trader. His financial year ends 30 September 2023.
On 1 January 2023, Savio rents out a part of his building to a trader who pays $2 400 upfront for 12 months of rent.
Savio receives commission, $375, every three months. On 30 September 2023, Savio has not yet received commission for the previous three months.
Prepare extracts of the financial statements to show how the rent received and commission received are treated.
Answer
Rent:
| Current financial period | ||||||||||||||
| O | N | D | J | F | M | A | M | J | J | A | S | O | N | D |
| $2 400 rent for the year |
-
Calculate the rent per month
- £2 400 ÷ 12 = $200
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Calculate the amount due for the financial year
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9 months included (J-F-M-A-M-J-J-A-S)
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9 ✕ $200 = $1 800
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This is the amount that will be stated on the income statement even though more has been received
-
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Identify the amount received in advance
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3 months prepaid (O-N-D)
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3 ✕ $200 = $600
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This will be listed as a current liability on the statement of financial position
-
Commission
-
Calculate the commission per month
- £375 ÷ 3 = $125
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Calculate the amount due for the financial year
-
12 ✕ $125 = $1 500
-
This is the amount that will be stated on the income statement even though not all of it has been received
-
-
Identify the amount still owed
-
3 months owing: $375
-
This will be listed as a current asset on the statement of financial position
-
| Savio Income Statement (extract) for the year ended 30 September 2023 | ||
| Other income | $ | $ |
| Rent | 1 800 | |
| Commission | 1 500 | |
| 3 300 |
| Savio Statement of Financial Position (extract) at 30 September 2023 | |
| $ | |
| Current assets | |
| Other receivables | 375 |
| Current liabilities | |
| Other payables | 600 |
Summary of adjustments
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
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Information about the provision for irrecoverable debts
-
How do I make adjustments with the additional notes?
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Each additional note is used twice in the financial statements
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It can adjust a figure stated in the trial balance
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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 accumulated 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 irrecoverable debts | Include the increase as an expense labelled as provision for irrecoverable debts | Subtract the total provision for irrecoverable debts from the trade receivables amount |
| Decrease in the provision for irrecoverable debts | Include the decrease as other income labelled as provision for irrecoverable debts | Subtract the total provision for irrecoverable debts from the trade receivables amount |
Examiner Tips and Tricks
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 2023 | ||
| Debit $ | 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 irrecoverable 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
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Inventory at 31 December 2023 was $14 000.
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Depreciation is to be charged on equipment at 20% per annum using the reducing balance method.
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Prepaid insurance at 31 December 2023 was $400.
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$300 rent was still owed to Junaid at 31 December 2023.
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Junaid had taken $500 goods for personal use. No entries were made in the ledger accounts.
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Junaid was unable to contact a credit customer, so their $1 000 was to be written off as irrecoverable debt.
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The provision for irrecoverable 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.
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Item 1 - closing inventory
-
Subtract the closing inventory from the purchases on the income statement
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List the closing inventory as a current asset on the statement of financial position
-
-
Item 2 - depreciation
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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
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List the year’s depreciation as an expense on the income statement
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Add the depreciation to the provision for depreciation
-
-
Item 3 - prepaid expense
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Subtract the prepayment from the insurance and list as an expense on the income statement
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List the prepayment of an expense (other receivables) as a current asset on the statement of financial position
-
-
Item 4 - accrued income
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Add the accrual to the rent received and list as other income on the income statement
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List the accrual of income (other receivables) as a current asset on the statement of financial position
-
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Item 5 - goods for own use
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Subtract these goods from the purchases on the income statement
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Add this amount to the drawing
-
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Item 6 - Irrecoverable debts
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Subtract the balance from the trade receivables
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List the irrecoverable debts as an expense on the income statement
-
-
Item 7 - provision for irrecoverable debts
-
Calculate the provision for irrecoverable 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
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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 | 74 000 | |
| Closing inventory | -14 000 | |
| Goods for own use | -500 | |
| Equipment at cost | 30 000 | |
| Provision for depreciation of equipment | 10 800 + 3 840 = 14 640 | |
| Insurance | 2 500 - 400 = 2 100 | |
| Rent received | 5 800 + 300 = 6 100 | |
| Trade receivables | 25 000 - 1 000 = 24 000 | |
| Provision for irrecoverable debts | 1 500 - 300 = 1 200 | |
| Trade payables | 14 000 | |
| Bank | 12 000 | |
| Inventory at 1 January 2023 | 18 000 | |
| Drawings | 8 000 + 500 = 8 500 | |
| Capital at 1 January 2023 | 21 000 | |
| Closing inventory | 14 000 | |
| Depreciation | 3 840 | |
| Other receivables | 400 + 300 = 700 | |
| Irrecoverable debts | 1 000 | |
| Decrease in provision for irrecoverable debts | 300 |
(a) Prepare the income statement using the usual format.
| Junaid Income Statement for the year ended 31 December 2023 | |||
| $ | $ | $ | |
| Revenue | 116 400 | ||
| Cost of sales | |||
| Opening inventory | 18 000 | ||
| Purchases | 74 000 | ||
| Goods for own use | (500) | ||
| Closing inventory | (14 000) | ||
| (77 500) | |||
| Gross profit | 38 900 | ||
| Other income | |||
| Rent received | 6 100 | ||
| Provision for irrecoverable debts | 300 | ||
| 6 400 | |||
| 45 300 | |||
| Expenses | |||
| Insurance | 2 100 | ||
| Irrecoverable debts | 1 000 | ||
| Depreciation of equipment | 3 840 | ||
| (6 940) | |||
| Profit for the year | 38 360 |
(b) Prepare the statement of financial position using the usual format.
| Junaid Statement of Financial Position at 31 December 2023 | |||
| $ | $ | $ | |
| Non-current assets | Cost | Accumulated depreciation | Carrying value |
| Equipment | 30 000 | (14 640) | 15 360 |
| Current assets | |||
| Inventory | 14 000 | ||
| Trade receivables | 24 000 | ||
| Provision for irrecoverable debts | (1 200) | 22 800 | |
| Other receivables | 700 | ||
| Bank | 12 000 | ||
| 49 500 | |||
| Total assets | 64 860 | ||
| Equity and liabilities | |||
| Equity | |||
| Opening equity | 21 000 | ||
| Profit for the year | 38 360 | ||
| Drawings | (8 500) | ||
| Total equity | 50 860 | ||
| Current liabilities | |||
| Trade payables | 14 000 | ||
| Total equity and liabilities | 64 860 |