Every year-end adjustment has two halves. One half changes a line in the income statement, and the other half changes an asset or a liability in the statement of financial position.
This lesson belongs to SPM Accounting adjustments. If the individual entries are still shaky, revisit adjusting accruals and prepayments first.
Why must an adjustment appear twice?
An adjustment moves a cost or an income into the year where it belongs. The expense or income goes to the income statement, and the matching balance is carried forward as an asset or a liability.
Think of a bank transfer. The money leaves one account and arrives in another, so showing only one side would leave the books out of balance.
Worked example: three adjustments, two statements
Kedai Mesra has a net profit of RM20 000 before adjustments for the year ended 31 December. Three adjustments are still to be made.
- Wages of RM800 for December are unpaid.
- Rent of RM1 500 was paid in December for January to March of next year.
- Depreciation of RM2 000 is to be charged on equipment bought for RM20 000, with accumulated depreciation of RM4 000 at the start of the year.
| Adjustment | Income statement | Statement of financial position |
|---|---|---|
| Wages owing RM800 | Wages expense up RM800 | Accrued wages RM800, current liability |
| Rent prepaid RM1 500 | Rent expense down RM1 500 | Prepaid rent RM1 500, current asset |
| Depreciation RM2 000 | Depreciation expense RM2 000 | Accumulated depreciation RM6 000, equipment at carrying amount RM14 000 |
Adjusted net profit = 20 000 − 800 + 1 500 − 2 000 = RM18 700.
Now run the balance check. Net assets change by +1 500 (prepaid rent) − 800 (accrued wages) − 2 000 (depreciation) = −1 300. Profit also changed by −1 300, from 20 000 to 18 700, so the two statements agree.
The mistake that costs marks
A common slip is to deduct the wages in the income statement and then forget the liability. The profit looks correct, but the statement of financial position is out by RM800, and the student adds the difference into capital to force a balance.
The fix is to tick each adjustment off twice, once per statement. A quick routine is: write the income statement effect, write the statement of financial position effect, then run the balance check.
How do you check the two statements agree?
Add up the statement of financial position effects of all adjustments: assets up or down, then liabilities up or down. The result must equal the total change in net profit.
If the two figures differ, one adjustment has only half an entry. Find the adjustment whose amount equals the gap.
Check yourself
Commission received of RM600 is for work the business will do next year. Net profit before this adjustment is RM9 000. What changes in each statement?
Answer
The RM600 is income for next year, so it is removed from this year’s income. Net profit = 9 000 − 600 = RM8 400.
In the statement of financial position, RM600 appears as commission received in advance, a current liability, because the business owes the work.
Balance check: net assets fall by RM600 (the new liability) and profit falls by RM600.
What to study next
Test the same idea across a full set of adjustments in the adjustments practice set. Then compare how depreciation and allowances behave in handling bad debts and allowances.
If you want a teacher to follow your own working through both statements, see online one-to-one Accounting tuition.