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Year-end adjustments and provisions in the final accounts

Edexcel IAL Accounting · WAC11 The Accounting System and Costing

Exam questions give a trial balance and a list of adjustments. Each adjustment changes one figure in the statement of profit or loss and one in the statement of financial position (spec 1.3.3 to 1.3.6).

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Each adjustment has two effects

Adjustment	Statement of profit or loss	Statement of financial position
Accrued expense	Add to the expense	Other payables (current liability)
Prepaid expense	Deduct from the expense	Other receivables (current asset)
Accrued income	Add to the income	Other receivables
Income received in advance	Deduct from the income	Other payables
Depreciation	Expense	Add to accumulated depreciation
Irrecoverable debt written off	Expense	Reduce trade receivables
Increase / decrease in allowance	Expense / income	Deduct the new allowance from receivables
Closing inventory	Deduct in cost of sales	Current asset
Goods taken by owner	Reduce purchases	Add to drawings

Provisions

A provision is an amount set aside for a liability or loss whose amount or timing is uncertain (IAS 37 uses the term for liabilities such as warranty claims). In Unit 1 you meet the idea in two forms:

Provision for depreciation (accumulated depreciation): the build-up of the cost of non-current assets used so far.
Allowance for irrecoverable debts: an estimate of receivables that will not be collected.

Both apply prudence and accruals: they are charged against profit in the period the loss arises and they reduce the asset in the statement of financial position. They are estimates, not cash set aside.

Working from a draft profit

Some questions give a draft profit and ask for the corrected figure after adjustments:

	£
Draft profit	42,000
Wages accrued	(900)
Insurance prepaid	350
Depreciation of equipment (10% of cost £45,000)	(4,500)
Irrecoverable debt written off	(380)
Decrease in allowance for irrecoverable debts	120
Rent receivable owing	250
Adjusted profit for the year	36,940

Worked example

Trade receivables are £19,380 before writing off an irrecoverable debt of £380. The allowance is to be 2% of receivables; it was £500. Find the allowance adjustment and the receivables figure in the statement of financial position.

Receivables after write-off = 19,000.
New allowance = 2% x 19,000 = 380.
Change = 380 - 500 = (120): a decrease of 120, added to profit.
Statement of financial position: 19,000 - 380 = 18,620.

Answer: Decrease in allowance £120 (income); net receivables £18,620.

Key idea: Every adjustment hits both statements. Provisions (depreciation, allowance for irrecoverable debts) are prudent estimates charged to profit and deducted from assets.

Check yourself

Draft profit is £30,000. Adjustments: electricity accrued £400; rates prepaid £600; depreciation £3,200; increase in allowance for irrecoverable debts £150. Calculate the adjusted profit.
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£26850. 30,000 - 400 + 600 - 3,200 - 150 = 26,850.
Equipment costing £18,000 was bought three months before the year end. Depreciation is 20% a year straight line, charged monthly. Calculate the depreciation for the year.
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£900. 18,000 x 20% x 3/12 = 900.
At the year end wages of £1,250 and loan interest of £375 are owing, and rent of £800 has been received in advance. Calculate total other payables.
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£2425. All three are amounts owed by the business: 2,425.
Which statement best describes a provision such as the allowance for irrecoverable debts?
- Cash put aside in a separate bank account
- A liability that is certain in amount
- A part of the owner's capital
- An estimate charged against profit to avoid overstating assets
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An estimate charged against profit to avoid overstating assets. Provisions are book entries based on estimates; no cash is set aside.
A 6% bank loan of £20,000 was taken out at the start of the year. Interest paid during the year was £700. What is the loan interest expense for the year?
- £700
- £1,200
- £500
- £1,900
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£1,200. Full year's interest is 6% x 20,000 = £1,200; £500 is accrued. The June 2024 examiners' report flagged charging only the amount paid.
The owner took goods costing £450 for personal use; no entry has been made. Which adjustment is correct?
- Increase revenue by £450 and add £450 to drawings
- Reduce closing inventory by £450
- Add £450 to expenses
- Reduce purchases by £450 and add £450 to drawings
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Reduce purchases by £450 and add £450 to drawings. Goods for the owner are drawings at cost and are removed from purchases.

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Sources

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (issue 2), Unit 1 and Appendices 6 to 8

Last updated 8 November 2026. Spotted a mistake? Tell us.