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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.

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What this dot point is asking
Why balance day adjustments are needed
The main adjustments
Preparing the three statements

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.

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.

From adjustment to statements

Hartley Ltd has Sales $500 000 and Cost of Sales$ 300 000, giving Gross Profit $200 000. Operating expenses before adjustments are$ 120 000. Two adjustments apply: accrued wages of $6 000 and depreciation of$ 14 000, adding $20 000 to expenses, so total expenses are$ 140 000.

\text{Profit} = 200\,000 - 140\,000 = 60\,000

In the Statement of Changes in Equity, opening Retained Earnings of $30 000 plus profit$ 60 000 less dividends $10 000 gives closing Retained Earnings of$ 80 000. On the Balance Sheet, the $6 000 accrued wages is a current liability and the$ 14 000 depreciation increases Accumulated Depreciation, reducing the equipment carrying amount. Assets equal Liabilities plus Equity remains intact.