Content Standard 8.7

Financial Statements with Adjustments

Penyata Kewangan dengan pelarasan

One-hour paid trial · Same-day reply · from RM50/hr

Explanation

Content Standard 8.7 brings together everything learned in Chapter 8 to prepare complete Financial Statements with all adjustments. After every year-end adjusting entry is recorded, we prepare the Adjusted Trial Balance (Imbangan Duga Terselaras). The Income Statement (Penyata Pendapatan) and the Statement of Financial Position (Penyata Kedudukan Kewangan) are then prepared from it. The Learning Standard requires students to prepare these statements in two forms (the T or account form, and the vertical statement format), taking into account all types of adjustments.

The Income Statement of a trading sole proprietorship has two parts. The first is the Trading Account, which computes Gross Profit, being Net Sales less Cost of Goods Sold. Cost of Goods Sold equals Opening inventory plus Net purchases plus Carriage inwards less Closing inventory. The second part is the Profit and Loss Account, which begins with Gross Profit, adds other income (such as discount received and accrued income), and deducts all adjusted expenses. The result is the Net Profit or Net Loss for the accounting period.

The adjustments that must be taken into account include accrued and prepaid expenses, accrued income and income received in advance, depreciation of non-current assets, bad debts, allowance for doubtful debts, and closing inventory. Every adjustment has two effects: one in the Income Statement and one in the Statement of Financial Position. For instance, depreciation is recorded as an expense in the Profit and Loss Account, while accumulated depreciation is deducted from the asset cost in the Statement of Financial Position to arrive at the net book value.

The Statement of Financial Position shows the position of assets, liabilities and owner's equity at the balance date. Non-current assets are shown at cost less accumulated depreciation. Current assets include closing inventory, debtors (less allowance for doubtful debts), prepaid expenses, accrued income, and cash/bank. Current liabilities include creditors, accrued expenses and income received in advance. Owner's equity is Opening capital plus Net Profit (or less Net Loss) less Drawings.

In the T form, the account is split into debit and credit sides; in the statement format, information is arranged vertically with clear subtotals. Both forms must yield the same Net Profit and the same Statement of Financial Position total because they are derived from the same data. This standard demands consistency: every figure in the Adjusted Trial Balance must go to the correct place, with nothing omitted or double-counted.

Worked examples

Adjusted Trial Balance data, Sri Aman Furniture Enterprise

Suppose Sri Aman Furniture Enterprise prepares statements on 31 December 2024. Selected balances from the Adjusted Trial Balance: Sales RM180,000; Purchases RM95,000; Opening inventory RM12,000; Closing inventory RM15,000; Carriage inwards RM2,000; Salaries RM24,000; Rent RM9,000; General expenses RM4,500; Depreciation of fittings RM3,000; Bad debts RM800; Allowance for doubtful debts RM600; Discount received RM1,200.

All figures already reflect adjustments. For example, salaries of RM24,000 already include accrued salaries of RM2,000, and rent of RM9,000 is already net of prepaid rent of RM1,000.

Income Statement for the year ended 31 December 2024

Trading section: Sales RM180,000 less Cost of Goods Sold. Cost of Goods Sold = Opening inventory RM12,000 + Purchases RM95,000 + Carriage inwards RM2,000 - Closing inventory RM15,000 = RM94,000. Therefore Gross Profit = RM180,000 - RM94,000 = RM86,000.

Profit and Loss section: Gross Profit RM86,000 + Discount received RM1,200 = RM87,200. Less expenses: Salaries RM24,000 + Rent RM9,000 + General expenses RM4,500 + Depreciation RM3,000 + Bad debts RM800 + Allowance for doubtful debts RM600 = RM41,900. Net Profit = RM87,200 - RM41,900 = RM45,300.

Extract of Statement of Financial Position as at 31 December 2024

Non-current assets: Fittings at cost RM30,000 less Accumulated depreciation RM3,000 = Net book value RM27,000. Current assets: Closing inventory RM15,000; Debtors RM20,000 less Allowance for doubtful debts RM600 = RM19,400; plus Bank RM8,600.

Owner's equity: Opening capital RM50,000 + Net Profit RM45,300 - Drawings RM6,000 = RM89,300. Related closing entry: Debit Profit and Loss RM45,300; Credit Capital RM45,300 to transfer net profit to the capital account.

Practice

The Adjusted Trial Balance of Damai Retail Shop shows: Sales RM120,000; Opening inventory RM8,000; Purchases RM70,000; Closing inventory RM9,500; Carriage inwards RM1,500. Compute Cost of Goods Sold and Gross Profit.

Answer: Cost of Goods Sold = Opening inventory RM8,000 + Purchases RM70,000 + Carriage inwards RM1,500 - Closing inventory RM9,500 = RM70,000. Gross Profit = Sales RM120,000 - Cost of Goods Sold RM70,000 = RM50,000.

From the following adjusted balances, compute Net Profit: Gross Profit RM50,000; Commission received RM3,000; Salaries RM18,000; Rent RM6,000; Depreciation RM2,500; Bad debts RM500; Allowance for doubtful debts RM400.

Answer: Total income = Gross Profit RM50,000 + Commission received RM3,000 = RM53,000. Total expenses = Salaries RM18,000 + Rent RM6,000 + Depreciation RM2,500 + Bad debts RM500 + Allowance for doubtful debts RM400 = RM27,400. Net Profit = RM53,000 - RM27,400 = RM25,600.

State the effect of a RM4,000 depreciation adjustment on a vehicle (cost RM40,000) in both financial statements.

Answer: In the Income Statement: Depreciation RM4,000 is recorded as an expense in the Profit and Loss Account, reducing Net Profit. In the Statement of Financial Position: the vehicle is shown at cost RM40,000 less Accumulated depreciation RM4,000 = Net book value RM36,000 under non-current assets.

Mr. Farid's opening capital is RM60,000. Net Profit for the year is RM25,600 and Drawings RM7,000. Compute owner's equity at the balance date and give the closing entry for drawings.

Answer: Owner's equity = Opening capital RM60,000 + Net Profit RM25,600 - Drawings RM7,000 = RM78,600. Closing entry for drawings: Debit Capital RM7,000; Credit Drawings RM7,000 to close the Drawings account by transferring its balance to the Capital account.

Exam tips

Key terms

Adjusted Trial Balance: A list of ledger balances after all adjusting entries are recorded, used as the basis for preparing financial statements.
Income Statement: A statement computing Gross Profit and Net Profit or Loss for an accounting period.
Statement of Financial Position: A statement showing assets, liabilities and owner's equity at the balance date.
Net book value: The cost of a non-current asset less accumulated depreciation: the value at which the asset is carried in the statement.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

Need help with Financial Statements with Adjustments?