9706 · 1.5.1
Adjustments to draft financial statements — FAQ
Frequently asked questions for 9706 Adjustments to draft financial statements. Direct answers first, then deeper explanation — then practise with marking.
Is an allowance for irrecoverable debts the same as writing off a specific debt?
No, they are different. Writing off an irrecoverable debt removes a specific, known, uncollectable amount from trade receivables. An allowance for irrecoverable debts is a general provision made against all remaining receivables for estimated, but not yet identified, future bad debts. It is an application of prudence, anticipating future losses.
Why do we add accrued expenses to the expense account in the Statement of Profit or Loss, even though the cash has not been paid?
This is due to the accruals (or matching) concept. The Statement of Profit or Loss must show the full cost incurred in generating the period's revenue, regardless of when the cash is paid. If a business used electricity in December, that cost helped generate December's sales. Therefore, the cost must be included in December's accounts, even if the bill is paid in January.
Does depreciation represent the fall in a non-current asset's market value?
No, this is a common misconception. Depreciation is not a process of valuation. It is the systematic allocation of an asset's cost over its useful life. The net book value (Cost - Accumulated Depreciation) shown on the Statement of Financial Position is the unallocated cost, not the asset's market value, which could be higher or lower.
What is the difference between an error of principle and an error of commission?
An error of principle is when a transaction is posted to the wrong type of account, violating an accounting principle (e.g., treating a capital expenditure like a non-current asset purchase as a revenue expenditure like repairs). An error of commission is when the correct type of account is used, but the wrong specific account (e.g., posting a sale to customer John Smith to the account of customer Jane Smith).