Adjustments

Question 1

How do you adjust for accrual?

Answer 1

Add to the relevant expense(IS)

Add as a current liability (e.g., “Accrued expenses”)(SFP)

Question 2

How do you adjust for prepayments?

Answer 2

Subtract from the relevant expense(IS)
Add as a current asset (e.g., “Prepaid expenses”)

Question 3

What about Depreciation (e.g. 20% on equipment)?

Answer 3

Record as an expense (Depreciation of equipment)(IS)

Reduce asset via accumulated depreciation under PPE

Question 4

What’s PPE

Answer 4

PPE stands for Property, Plant and Equipment. It’s a category of long-term assets that a company owns and uses to generate revenue and profits. These assets are tangible and expected to be used for more than one yea

Question 5

What about adjusting for Asset sale (e.g. sold for more/less than NBV)

Answer 5

Record gain or loss on sale in Other Income or Expenses(IS)

Remove asset and related acc. dep. from SFP; add/dispose of cash received

Question 6

Adjustment for Revaluation of land/buildings

Answer 6

No entry in IS (if gain) – it’s not income

Increase asset value in PPE; create Revaluation Reserve in equity
(SFP)

Question 7

Bad debts written off

Answer 7

Add to Bad Debt Expense(IS)

Reduce Trade Receivables (asset)(SFP)

Question 8

Provision for Bad Debts (e.g. 5% of receivables)

Answer 8

Change in provision is a gain or loss in IS

Deduct from Trade Receivables in SFP (net figure)

Question 9

Dividends: Proposed (Equity)

Answer 9

No effect in IS
(SFP) Reduce Retained Earnings (as distribution) and show as current liability if declared

Question 10

Preference dividends

Answer 10

Deduct from Profit After Tax in IS
(IS)
No separate entry in SFP (already part of share capital)

Question 11

Debenture interest (e.g. unpaid)

Answer 11

Record full interest expense in IS

If unpaid, add as current liability in SFP (accrued interest)