ACC106 – PREPARATION OF FINANCIAL STATEMENTS - ADJUSTMENTS

EXAMPLE 1

ADAN TRADING
Trial Balance as at 31 December 2023 (extract)
DR CR
Advertising 12,000
Utility 6,000
Commission 5,000
Rent 26,000
5% Bank Loan 120,000
Interest on bank loan 5,000

Additional information:
a) December 2023 utility bill amounting to RM450 was unpaid.
b) Advertising was paid for a period September 2023 until August 2024.
c) Commission RM1,500 for the month of December 2023 was yet to be
received.
d) Rental of RM1,200 for January 2024 was received in December 2023.
e) The bank loan was received on 1 February 2023.
Prepare the extract of:
i. Statement of Profit or Loss for the year ended 31 December 2023.
ii. Statement of Financial Position as at 31 December 2023.

ANSWER:
Info (a): December 2023 utility bill amounting to RM450 was unpaid.
This represents an accrued expense where utility services were utilized in the
year 2023 but the corresponding payment was not made by the conclusion of
the accounting period ending on December 31, 2023.
Workings:
Total utility expense in SOPL
= RM6,000 + RM450 accrued expense = RM6,450
In SOFP = RM450 as an ACCRUED UTILITY EXPENSE (Current
Liability)
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DR Utility expense 450 (add to utility)
CR Accrued utility expense 450 (add to Current Liability: SoFP)

ADAN TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023
(EXTRACT)

EXPENSES
UTILITY [6,000 + 450] 6,450

ADAN TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (extract)

CURRENT LIABILITIES
Accrued utility 450

Answer
Info (b): Advertising was paid for a period September 2023 until August 2024.
The payment made for advertising expenses encompasses the period extending
beyond the current accounting year, specifically from January 2024 to August
2024. As the accounting period ended on December 31, 2023, the amount
corresponding to the advertising services for the period from January 2024 to
August 2024 cannot be reported in the financial statements for the current
accounting period ended 31 December 2023. This amount paid for advertising,
covering the period from January 2024 to August 2024, is classified as a
prepaid advertising expense.
Workings:
Calculate the amount paid covering the period from Jan 2024 – Aug 2024:
12,000 x 8/12 = 8,000 (amount advertising paid in advance)
Total advertising expense in SOPL:
= RM12,000 – RM8,000 prepaid expense = RM4,000 (expenses in SOPL)
In SOFP = RM8,000 as PREPAID ADVERTISING EXPENSE (Current
Asset)

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DR Prepaid advertising expense 8,000
CR Advertising expense 8,000

ADAN TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023
(EXTRACT)

EXPENSES
Advertising [12,000 – 8,000] 4,000

ADAN TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (extract)

CURRENT ASSET
Prepaid advertising expense 8,000

Answer
Info (c): Commission RM1,500 for the month of December 2023 was yet to be
received.
The commission earned for the month of December 2023 needs to be recorded
in the current accounting period ending on December 31, 2023, as the business
has already earned this revenue. Accrued revenue which refers to revenue
that has been earned but not yet received, the commission for December
2023 falls within the scope of revenue that should be reported in the financial
statements for the current accounting period (ended on Dec 2023).

Workings:
Total commission revenue in SOPL:
= RM5,000 + RM1,500 accrued revenues = RM6,500 (other income)
In SOFP = RM1,500 as ACCRUED Commission Revenue (Current Asset)

DR Accrued Commission revenue 1,500

CR Commission revenue 1,500

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 ADAN TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023
(EXTRACT)

OTHER INCOME
Commission revenue [5,000 + 1,500] 6,500

ADAN TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (extract)

CURRENT ASSET
Accrued commission revenue 1,500

Answer
Info (d): Rental of RM1,200 for January 2024 was received in December 2023.
The rental revenue for January 2024 was received in advance, specifically in
December 2023. The payment of RM1,200, representing revenue for the year
2024, was received in the current accounting period ending on December 31,
2023. However, this amount cannot be reported in the financial statements for
the current period because the business has not yet earned this revenue. In the
financial statements for the year ending on December 31, 2023, the January
2024 rent revenue is categorized as Prepaid Revenue (Unearned revenue) and
is classified as a Current Liability, reflecting the fact that the business has not
earned the revenue at this point.
Workings:
Total rent revenue in SOPL:
= RM26,000 – RM1,200 prepaid revenues = RM24,800
In SOFP = RM1,200 as PREPAID RENT REVENUE (Current Liability)
DR Rent revenue 1,200
CR Prepaid rent revenue 1,200

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 ADAN TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023
(EXTRACT)

OTHER INCOME
Rent revenue [26,000 + 1,200] 24,800

ADAN TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (extract)

CURRENT LIABILITY
Prepaid rent revenue 1,200

Answer
Info (e): The bank loan was received on 1 February 2023.
This statement typically relates to the interest on a bank loan, whether paid
or unpaid by the business in the current accounting period. According to the
information provided, the total interest on the loan paid amounted to
RM5,000. To assess the situation, the initial step involves determining if the
business has fully paid, partially paid, or overpaid the annual interest. The
total annual interest on the bank loan is calculated as 5% of RM120,000, resulting
in RM6,000. However, the Trial Balance indicates that the total interest on
the bank loan is recorded as RM5,000. This discrepancy (RM1,000) reveals
that the business has underpaid the interest.
Workings:
Total interest on bank loan in SOPL:
= RM5,000 + RM1,000 accrued interest expense = RM6,000
In SOFP = RM1,000 as an ACCRUED INTEREST ON BANK LOAN
(Current Liability)
DR Interest on bank loan 1,000
CR Accrued interest on bank loan 1,000

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 ADAN TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023
(EXTRACT)

EXPENSES
Interest on bank loan [5,000 + 1,000] 6,000

ADAN TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (extract)

CURRENT LIABILITY
Accrued interest on bank loan 1,000

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EXAMPLE 2

DINDAN TRADING
Trial Balance as at 31 December 2023 (extract)
DR CR
Land 500,000
Building 350,000
Machinery 250,000
Furniture and fittings 28,000
Accumulated depreciation
as at 1 January 2023:
Building 21,000
Machinery 90,000
Furniture and fittings 5,600

Additional information:
The depreciation policy of the business is as follows:
Building – to be depreciated using its useful life of 50 years (straight line
method), yearly basis.
Machinery – 20% on carrying value (reducing balance method), yearly basis
Furniture and fittings – 10% on cost (straight line method), yearly basis

Prepare the extract of:

i. Statement of Profit or Loss for the year ended 31 December 2023.
ii. Statement of Financial Position as at 31 December 2023.

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Answer - Example 2
BUILDING
Workings:
Depreciation policy: to be depreciated using its useful life of 50 years
Calculate the current depreciation for building:
= 350,000/50 years = 7,000
Total depreciation expense for building in SOPL = RM7,000
In SOFP = Accumulated depreciation as of 1 Jan 2023 (given in the Trial
balance) RM21,000 + current depreciation RM7,000 = RM28,000

DR Depreciation - Building 7,000

CR Accumulated depreciation - Building 7,000

Answer - Example 2
MACHINERY
Workings:
Depreciation policy: 20% on carrying value (reducing balance method),
Calculate the current depreciation for machinery:
= 20% x [250,000 – 90,000] = 32,000

Total depreciation expense for machinery in SOPL = RM32,000

In SOFP = Accumulated depreciation as of 1 Jan 2023 (given in the Trial
balance) RM90,000 + current depreciation RM32,000 = RM122,000

DR Depreciation - Machinery 32,000

CR Accumulated depreciation - Machinery 32,000

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Answer - Example 2
FURNITURE AND FITTINGS
Workings:
Depreciation policy: 10% on cost (straight line method), yearly basis
Calculate the current depreciation for furniture and fittings:
= 10% x 28,000 = 2,800

Total depreciation expense for furniture and fittings in SOPL = RM2,800

In SOFP = Accumulated depreciation as of 1 Jan 2023 (given in the Trial
balance) RM5,600 + current depreciation RM2,800 = RM8,400

DR Depreciation - furniture and fittings 2,800

CR Accumulated depreciation - furniture and fittings 2,800

DINDAN TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023
(EXTRACT)

EXPENSES
Depreciation - building [350,000/50] 7,000
Depreciation – machinery 20% x [250,000 – 90,000] 32,000
Depreciation – furniture and fittings [10% x 28,000] 2,800

DINDAN TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (EXTRACT)
NON-CURRENT ASSETS COST ACCUMULATED CARRYING
DEPRECIATION AMOUNT
Land 500,000 0 500,000

Machinery 250,000 122,000 128,000

[90,000 + 32,000]
Building 350,000 28,000 322,000
[21,000 + 7,000]
Furniture and fittings 28,000 8,400 19,600
[5,600 + 2,800]

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EXAMPLE 3

TANTURA TRADING
Trial Balance as at 31 December 2023 (extract)
DR CR
Accounts Receivable 150,000
Allowance for Doubtful Debts (1 January 2023) 5,000
Bank 60,000

Additional information:
a) A receivable account amounting to RM3,000 was considered
uncollectible.
b) Aila Trading, whose accounts receivable had been previously deemed
uncollectible and written off as a bad debt, has now submitted a payment
of RM2,000 via cheque.
c) The allowance for doubtful debts is to be made at 2% of the accounts
receivable balance.
Prepare the extract of:
i. Statement of Profit or Loss for the year ended 31 December 2023.
ii. Statement of Financial Position as at 31 December 2023.

Answer - Example 3
Info (a): A receivable account amounting to RM3,000 was considered
uncollectible*.
*This account needs to be written off (removed from the books) because the
debtor is unable to pay the outstanding amount.
DR Allowance for doubtful debts 3,000*(remove from allowance)
CR Accounts Receivable 3,000* (remove)

Hence:
The accounts receivable balance after writing off the uncollectible amount
= RM150,000 – 3,000 = RM147,000

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The balance of allowance for doubtful debts account after writing off the
uncollectible amount = RM5,000 – 3,000 = RM2,000

Info (b): Aila Trading, whose accounts receivable had been previously
deemed uncollectible and written off as a bad debt, has now submitted a
payment of RM2,000 via cheque.
Aila Trading's account had been previously eliminated from the books.
Subsequently, Aila Trading made a payment to settle its account, a scenario
referred to as a bad debt recovery.
The impact of a bad debt recovery is reflected in the increase of the bank
asset (due to the receipt of payment by cheque) and the increase of other
income, that is Bad Debt Recovered.
DR Account Receivable 2,000#
CR Bad debt recovered 2,000 (in SOPL: OTHER INCOME)

DR Bank 2,000 (add to Bank: CA, SOFP)

CR Accounts Receivable 2,000# (#Dr + and - CR = 0)

Info (c): The allowance for doubtful debts is to be made at 2% of the accounts
receivable balance.
Calculate the new allowance amount:
2% x adjusted account receivable
= 2% x RM147,000 = 2,940

The balance of allowance for doubtful debts account after writing off the
uncollectible amount = RM5,000 – 3,000 = 2,000
New allowance 2,940
Less: adjusted allowance 2,000
Increase in allowance 940 (in SOPL: Expenses)

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 Allowance for Doubtful Debts Ac

Accounts Receivable 3,000 Balance b/d 5,000

SOPL - increase in
Balance c/d 2,940 allowance 940

5,940 5,940

TANTURA TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023 (EXTRACT)

OTHER INCOME

Bad debt recovered 2,000

EXPENSES

Increase in allowance for doubtful debts 940

TANTURA TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (EXTRACT)

CURRENT ASSETS

Inventories XXXX

Accounts receivable 147,000

Less: Allowance for doubtful debts (2,940*) 144,060

Bank [60,000 + 2,000] 62,000

*new allowance

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EXAMPLE 4

FAST TRADING
Trial Balance as at 31 December 2023 (extract)
DR CR
Accounts Receivable 80,000
Allowance for Doubtful Debts (1 January 2023) 3,000
Bank 50,000

Additional information:
a) An account receivable of RM1,500 was to be written off as bad debts.
b) Aila Trading, an account receivable which account written off as bad
debt made a payment for the amount of RM1,800 by cheque.
c) The allowance for doubtful debts is to be made at 1% of the accounts
receivable balance.
Prepare the extract of:
i. Statement of Profit or Loss for the year ended 31 December 2023.
ii. Statement of Financial Position as at 31 December 2023.

Info (c):

Allowance for Doubtful Debts Ac

Accounts Receivable 1,500 Balance b/d 3,000

SOPL - decrease in allowance* 715

Balance c/d 785

3,000 3,000

[1% x (80,000 - 1,500] = 785

*in SOPL: Other income

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 FAST TRADING
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 2023 (EXTRACT)

OTHER INCOME

Bad debt recovered 1,800

Decrease in allowance for doubtful debts 715

FAST TRADING
STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2023 (EXTRACT)

CURRENT ASSETS

Inventories XXXX

Accounts receivable [80,000 – 1,500] 78,500

Less: Allowance for doubtful debts (785*) 77,715

Bank [50,000 + 1,800] 51,800

*new allowance

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