Each adjustment changes profit and also changes one line in the statement of financial position. An effects grid lists both changes side by side so neither is forgotten.
This lesson is part of year-end adjustments that students confuse. A second worked set is in connecting adjustments to both financial statements.
What does the effects grid show?
Each adjustment type has a fixed pattern. Learn the pattern once and every question becomes a fill-in.
| Adjustment | Profit | Statement of financial position |
|---|---|---|
| Accrued expense | Down | Current liability up |
| Prepaid expense | Up | Current asset up |
| Income received in advance | Down | Current liability up |
| Accrued income | Up | Current asset up |
| Bad debt written off | Down | Receivables down |
Worked example: Kedai Buku Arif
Net profit before adjustments for the year ended 31 December is RM12 000. Four adjustments follow.
- Loan interest of RM150 is unpaid.
- Insurance of RM500 was paid for next year.
- Commission of RM400 was received for work to be done next year.
- A bad debt of RM350 is to be written off.
| Adjustment | Effect on profit | Statement of financial position |
|---|---|---|
| Loan interest accrued | −150 | Accrued interest 150, current liability |
| Insurance prepaid | +500 | Prepaid insurance 500, current asset |
| Commission in advance | −400 | Commission received in advance 400, current liability |
| Bad debt | −350 | Trade receivables down 350 |
Adjusted net profit = 12 000 − 150 + 500 − 400 − 350 = RM11 600.
Balance check: assets change by +500 − 350 = +150, and liabilities change by +150 + 400 = +550. Net assets change by 150 − 550 = −400, which equals the change in profit, 11 600 − 12 000 = −400.
The mistake that costs marks
The most common slip is to adjust profit and stop. The prepaid insurance is then missing from current assets, and the statement of financial position is out by RM500.
The second slip is to treat commission received in advance as income. The money did arrive, but the work is next year’s, so it is a liability this year.
| Item | Wrong | Right |
|---|---|---|
| Commission in advance | Income RM400 | Liability RM400 |
| Insurance prepaid | Expense only | Expense reduced, asset RM500 |
Check yourself
Net profit before adjustments is RM8 000. Rent of RM300 is accrued, and rent income of RM200 is due but not yet received. Find the adjusted profit and the two statement of financial position lines.
Answer
Adjusted profit = 8 000 − 300 + 200 = RM7 900.
Accrued rent expense RM300 is a current liability. Rent income receivable RM200 is a current asset.
Balance check: net assets change by +200 − 300 = −100, which matches the change in profit, 7 900 − 8 000 = −100.
What to study next
Test the whole set on the original integrated practice. For a teacher to go through your own grid, see online one-to-one Accounting tuition.