Topic 13 - Financial statements (with adjustments)

Question 1

What adjustments are required to be made to a trial balance for transactions that have not yet been taken into account?

Answer 1

• Expenses accrued and prepaid
• Revenues accrued and in advance
• Provision for irrecoverable debts
• Provision for depreciation
• Correction of errors discovered on last day of the year
• Other transactions that occur on/before the last day of the financial year and have not yet been recorded

Question 2

What does knowing what profits are being made help the business do?

Answer 2

• Evaluation of performance
• Planning ahead
• Obtaining loans from banks
• Telling prospective business partners how successful the business is
• Telling someone who may be interested in buying the business how successful the business is
• Calculating the tax due on the profits

Question 3

What is the difference between a liability and a provision?

Answer 3

A liability is an amount owing which can be determined with substantial accuracy and must be paid.

A provision is an amount set aside against profits to cover for a known liability of which the amount/timing cannot be determined with substantial accuracy. Provisions follow the prudence and accruals concept and enable a true and fair view.