Adjustments to draft financial statements — common mistakes

In any question requiring adjustments, always start by considering the accruals concept. Ask yourself: 'In which period was this expense incurred or this revenue earned?' This will guide you to the correct adjustment.

Pay close attention to dates. If a business pays rent of £12,000 for the year to 31 March 2025, but its year-end is 31 December 2024, then 3 months (£3,000) is a prepayment. Always draw a timeline if you are unsure.

When calculating reducing balance depreciation, always use the Net Book Value (NBV) at the start of the year. For an asset purchased part-way through the year, you must pro-rate the depreciation charge for that first year unless the question specifies a full year's charge is applied in the year of purchase.

Always write off specific irrecoverable debts before calculating the closing allowance for irrecoverable debts. The allowance is calculated as a percentage of the remaining, net trade receivables.

In exam questions, you may be given a list of inventory items with both cost and NRV. You must assess each item or group of items individually and select the lower value for each, then sum these lower values to find the total closing inventory figure.

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.

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.

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.

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).