How are balance day adjustments processed and used to prepare a company's financial statements?
Process balance day adjustments for accruals, prepayments, depreciation, doubtful debts and stock, and prepare a classified Income Statement, Statement of Changes in Equity and Balance Sheet for a company
WACE Year 12 Accounting and Finance Unit 3 on balance day adjustments and reporting: accruals, prepayments, depreciation, doubtful debts and the accrual basis, then preparing the classified Income Statement, Statement of Changes in Equity and company Balance Sheet.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
SCSA wants you to journalise balance day adjustments, explain why each is needed under accrual accounting, and prepare the three company financial statements in correct classified form.
Why balance day adjustments are needed
The main adjustments
- Accrued expense: an expense incurred but not yet paid (for example wages owing). Debit the expense, credit a liability (Accrued Wages).
- Prepaid expense: a cost paid in advance for future benefit. The unused portion is an asset. Debit the expense for the used portion, leaving the asset balance.
- Accrued revenue: revenue earned but not yet received. Debit a receivable, credit the revenue.
- Unearned revenue: cash received before the service is provided. It is a liability until earned.
- Depreciation: allocating the cost of a non-current asset over its useful life. Debit Depreciation Expense, credit Accumulated Depreciation.
- Doubtful debts: estimating receivables unlikely to be collected. Debit Bad and Doubtful Debts Expense, credit Allowance for Doubtful Debts.
The order of work at balance day
A reliable routine prevents lost marks. First, identify each adjustment from the additional information and decide which two accounts it touches. Second, post the adjustment so the expense or revenue lands in the Income Statement and the asset, liability or contra account lands in the Balance Sheet. Third, build the classified Income Statement to find profit. Fourth, carry that profit into the Statement of Changes in Equity to find closing Retained Earnings. Finally, assemble the classified Balance Sheet using the adjusted figures, checking that Assets equal Liabilities plus Equity. Because the statements are linked, an error in one adjustment ripples through all three, which is why a single missed second effect is so costly.
Classification on the Balance Sheet also earns marks. Current assets and current liabilities are those expected to be realised or settled within twelve months: cash, receivables, inventory, prepayments on the asset side, and accrued expenses, unearned revenue and the current portion of borrowings on the liability side. Non-current items include property, plant and equipment (shown net of accumulated depreciation) and long-term loans. Equity lists share capital, reserves and retained earnings.
Preparing the three statements
Income Statement reports revenue less expenses to arrive at profit, often showing Gross Profit (Sales less Cost of Sales) then less operating expenses.
Statement of Changes in Equity reconciles opening to closing equity: opening Retained Earnings plus profit less dividends, plus any share issues and reserve movements.
Balance Sheet classifies assets and liabilities into current and non-current, and reports equity. It must balance.
Exam-style practice questions
Practice questions written in the style of SCSA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
WACE 20219 marksAt 30 June, Lyle Ltd has Sales 430 000 and operating expenses before adjustments of 8 000; insurance prepaid 22 000; doubtful debts to be raised by $4 000. Calculate profit after the adjustments and state the Balance Sheet effect of each adjustment.Show worked answer →
A 9 mark response needs each adjustment, the revised profit, and the Balance Sheet effect.
Gross profit. .
Adjusting expenses. Start at +8,000-5,000+22,000+4,000= 150,000 + 8,000 - 5,000 + 22,000 + 4,000 = 179,000$.
Profit. .
Balance Sheet effects. Accrued wages is a current liability; prepaid insurance is a current asset; accumulated depreciation rises , cutting equipment carrying amount; the allowance for doubtful debts rises , cutting receivables to net realisable value. Markers reward each adjustment with the right sign, the revised profit, and the matching Balance Sheet item.
WACE 20235 marksExplain why every balance day adjustment affects both the Income Statement and the Balance Sheet, using accrued wages and depreciation as examples.Show worked answer →
A 5 mark response needs the double-entry logic and both examples.
Double-entry. Every adjustment has two equal effects because of double-entry: one side adjusts an income or expense (Income Statement) and the other adjusts an asset or liability (Balance Sheet). This keeps the accounting equation in balance.
Accrued wages. Debit Wages Expense (raises expense, lowers profit) and credit Accrued Wages, a liability on the Balance Sheet. The expense is recognised in the period incurred even though cash has not been paid.
Depreciation. Debit Depreciation Expense (lowers profit) and credit Accumulated Depreciation, a contra-asset that reduces the asset's carrying amount on the Balance Sheet. Recording the expense without the contra account would overstate assets and unbalance the statements. Markers reward the dual-effect principle and both correctly traced examples.