Adjustments bring the accounts up to date at the end of the year. They make sure the income statement shows what belongs to the year, and the statement of financial position shows what the business really owns and owes.
This page sits inside SPM Accounting. It shows how the adjustment lessons connect and where to begin.
What does this chapter cover?
The lessons in this chapter each deal with one reason the trial balance is not yet final. Some costs have been used but not paid, some have been paid for the future, assets wear out, some customers will not pay, and stock is still on the shelves.
The main lessons are:
- Adjusting accruals and prepayments matches expenses and income to the year they belong to.
- Accounting for depreciation spreads the cost of an asset over its life.
- Handling bad debts and allowances deals with customers who will not pay.
- Adjusting inventory and drawings fixes the cost of goods sold and the owner’s withdrawals.
- Connecting adjustments to both financial statements shows where each entry lands.
How do the parts connect?
All adjustments follow one idea: record the cost or income in the year it belongs to, not in the year the cash moved. An accrual adds a cost that has not yet been paid, and a prepayment removes a cost that belongs to next year.
Depreciation and bad debts apply the same logic to assets. In each case the adjustment has two sides, a change in profit and a change in an asset or liability.
One short example
A business shows profit of RM30 000 before adjustments. Depreciation of RM4 500 reduces profit, accrued wages of RM2 000 reduce it further, and prepaid rent of RM1 200 removes a cost that belongs to next year, which raises it.
Adjusted profit is 30 000 − 4 500 − 2 000 + 1 200 = RM24 700. The cash did not change at all, yet the profit did, because the year’s performance is now measured correctly.
Who should start where?
Begin with accruals and prepayments if adjustments are new. If you can post entries but keep missing one when a question lists several, try the year-end adjustments that students confuse page. Then test yourself with the adjustments practice set.
Where adjustments end up is covered in financial statements of a sole trader. For a teacher to explain the reason behind each entry on your own questions, see online one-to-one Accounting tuition.