Balance Day Adjustments (SACE Stage 2 Accounting)
“Prepare balance day adjustments for accruals, prepayments, depreciation and doubtful debts to produce accurate final reports”
Balance day adjustments are general journal entries made on the last day of the period so that the income statement shows revenue earned and expenses incurred, not just cash moved. The five common adjustments are accrued expenses, prepaid expenses, accrued revenue, unearned revenue, and the allocation entries for depreciation and doubtful debts.
Jump to a section
What this dot point is asking
You need to identify when an adjustment is required, prepare the adjusting journal entry, and explain how it changes the income statement and the balance sheet.
Why adjustments are needed
The accrual basis says revenue is recognised when earned and expenses when incurred, regardless of cash timing. During the year transactions are recorded as cash moves, so at balance day some accounts are wrong. Adjustments correct them, applying the matching idea that expenses are reported in the same period as the revenue they help earn.
The five adjustment types
- Accrued expense: incurred but not yet paid (for example wages owing). Dr Expense, Cr Accrued expense (liability).
- Prepaid expense: paid in advance, part still unused (for example insurance). Dr Prepaid expense (asset), Cr Expense.
- Accrued revenue: earned but not yet received. Dr Accrued revenue (asset), Cr Revenue.
- Unearned revenue: received in advance, not yet earned. Dr Revenue, Cr Unearned revenue (liability).
- Allocation entries: depreciation of non-current assets and the allowance for doubtful debts.
Depreciation and doubtful debts
Depreciation spreads the cost of a non-current asset over its useful life. The straight-line entry is Dr Depreciation expense, Cr Accumulated depreciation (a contra-asset that reduces the carrying amount on the balance sheet).
The allowance for doubtful debts applies prudence: some debtors will not pay, so an estimated expense is recognised now. The entry is Dr Bad and doubtful debts expense, Cr Allowance for doubtful debts (a contra-asset that reduces net debtors).
Four items at 30 June
Wages of $2,000 are owing but unpaid. Dr Wages expense $2,000; Cr Accrued wages $2,000. Expenses rise $2,000, a current liability appears.
Insurance $3,600 was paid on 1 April for a full year. Only three months () is used this year; nine months () is prepaid. Dr Prepaid insurance $2,700; Cr Insurance expense $2,700. The expense falls to the used portion, an asset of $2,700 appears.
Depreciation on equipment is $5,000. Dr Depreciation expense $5,000; Cr Accumulated depreciation $5,000. Profit falls; carrying amount falls.
Doubtful debts estimated at $1,200. Dr Bad and doubtful debts expense $1,200; Cr Allowance for doubtful debts $1,200. Net debtors fall to a more realistic figure.
Net effect on profit: expenses change by , so profit falls $5,500 once the unused insurance is removed from expenses.
Reversing entries and the new period
Some accrual and prepayment adjustments are reversed on the first day of the next period so that the routine cash entries in the new year can be recorded normally without double counting. For example, if wages of $2 000 were accrued at 30 June, reversing the entry on 1 July (Dr Accrued wages $2 000; Cr Wages expense $2 000) means that when the full wages are paid in July the bookkeeper can simply debit Wages expense for the whole cash amount, and the expense recognised in the prior year is automatically removed from the new year. SACE does not always require reversing entries, but understanding them explains why an accrued expense is a temporary balance-day construct rather than a permanent account, and it reinforces that the accrual basis is about timing, not about which period the cash happens to move in.
Effect on both statements
Every adjustment touches the income statement and the balance sheet. An accrued expense raises expenses (lower profit) and creates a liability. A prepaid expense lowers the current expense and creates an asset. This dual effect is why adjustments must be made before the reports are prepared, never after.
Treating a prepayment backwards. When insurance is paid in advance, the prepaid (unused) portion is an asset and only the used portion is the expense. Students often record the whole payment as the expense and forget to carry the unused part forward, overstating expenses and understating both profit and assets.
Exam-style questions
Questions in the style of SACE Board exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
2022 SACE Stage 2-style3 marksComplete the general journal entries to record the adjustments shown: adjustment for prepaid insurance, and adjustment for unearned service revenue. (Prepaid insurance of $3,600 was paid on 1 June and covers the 6 months to 30 November 2022; services revenue includes $1,340 for work that will not be performed until 10 July 2022.)Show worked answer →
Work out the unused portion of each item, then record the adjustment.
Prepaid insurance. The $3,600 covers 6 months. At 30 June only 1 month (1-30 June) is used, so the expense is $3,600 / 6 = $600 and the unused $3,000 stays an asset. The payment was first recorded as prepaid insurance (an asset), so the adjustment transfers the used part to expense: Dr Insurance expense $600; Cr Prepaid insurance $600. This recognises only the incurred portion (matching) and reduces the asset to $3,000.
Unearned service revenue. The $1,340 has been received but the work is not performed until 10 July, so it is not yet earned. Revenue is currently overstated, so: Dr Services revenue $1,340; Cr Unearned service revenue (a liability) $1,340. This defers the income to the period in which it is earned, applying the accrual basis.
Markers want the correct accounts, the correct dollar amounts and the right debit and credit direction for each entry.
2023 SACE Stage 2-style2 marksDiscuss the principle of faithful representation and how it applies to balance day adjustments.Show worked answer →
Faithful representation means financial information should depict economic reality completely, neutrally and free from material error, so the reports are reliable for decision making.
Balance day adjustments are how this principle is applied at year end. Without them the ledger only reflects cash that has moved, which would not faithfully represent the business. For example:
- Accruing wages owing recognises an expense and a liability that genuinely exist at balance day.
- Recording depreciation and the allowance for doubtful debts states assets at amounts the business can realistically expect to recover.
- Adjusting prepayments and unearned revenue reports only the expense incurred and the revenue earned in the period.
By making these adjustments, profit and the balance sheet faithfully represent performance and position rather than overstating or understating them. Markers reward a clear definition plus at least one linked adjustment example.
Practise this
Sources & how we know this
- Stage 2 Accounting subject outline (2025 onwards) — SACE Board
- Stage 2 Accounting: external assessment — SACE Board