Easy Worked Examples: Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements
These six easy examples introduce single-step adjustments: prepayments, accruals, bad debts, provision for doubtful debts, straight-line depreciation and asset disposal. Each one uses small, round RM figures.
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Example 1: Example 1: Prepaid Insurance
Question
Solution plan
Prepaid means the expense is paid but not yet used in the current year. RM300 must be removed from the insurance expense. Debit Prepaid Insurance (current asset) and credit Insurance (reducing the expense). The insurance expense taken to the Profit and Loss Account is RM1,500 - RM300 = RM1,200.
General Journal
Date
Particulars
Debit (RM)
Credit (RM)
2023 Dec 31
Prepaid Insurance
300
Insurance
300
(Recording prepaid insurance)
Total
300
300
Profit and Loss Account (extract)
Particulars
RM
Less: Expenses
Insurance (1,500 - 300)
1,200
Statement of Financial Position (extract)
Particulars
RM
Current Assets
Prepaid Insurance
300
Answer
Prepaid insurance of RM300 is recorded as a current asset. The insurance expense in the Profit and Loss Account is RM1,200.
Where marks are usually lost
Example 2: Example 2: Accrued Salaries
Question
Solution plan
Accrued means the expense is used but not yet paid. The salaries expense must be increased by RM500. Debit Salaries (increasing the expense) and credit Accrued Salaries (current liability). The salaries expense in the Profit and Loss Account is RM11,500 + RM500 = RM12,000.
General Journal
Date
Particulars
Debit (RM)
Credit (RM)
2023 Dec 31
Salaries
500
Accrued Salaries
500
(Recording accrued salaries)
Total
500
500
Profit and Loss Account (extract)
Particulars
RM
Less: Expenses
Salaries (11,500 + 500)
12,000
Statement of Financial Position (extract)
Particulars
RM
Current Liabilities
Accrued Salaries
500
Answer
Accrued salaries of RM500 are recorded as a current liability. The salaries expense in the Profit and Loss Account is RM12,000.
Where marks are usually lost
Example 3: Example 3: Bad Debts
Question
Solution plan
A bad debt is a debt that can no longer be collected. It becomes a business expense. Debit Bad Debts (expense) and credit Accounts Receivable (Rosli) to remove the debt. Bad Debts RM600 is taken to the debit of the Profit and Loss Account.
General Journal
Date
Particulars
Debit (RM)
Credit (RM)
2023 Dec 31
Bad Debts
600
Accounts Receivable (Rosli)
600
(Writing off a bad debt)
Total
600
600
Accounts Receivable (Rosli)
Date
Particulars
RM
Date
Particulars
RM
Dec 31
Balance b/d
600
Dec 31
Bad Debts
600
600
600
Profit and Loss Account (extract)
Particulars
RM
Less: Expenses
Bad Debts
600
Answer
A bad debt of RM600 is written off. The Accounts Receivable (Rosli) account is closed with a nil balance and RM600 is recorded as an expense in the Profit and Loss Account.
Where marks are usually lost
Example 4: Example 4: Creating a Provision for Doubtful Debts
Question
Solution plan
The Provision for Doubtful Debts is an estimate of debts that may not be collected. Calculation: 5% x RM20,000 = RM1,000. As this is created for the first time, the whole RM1,000 is an expense. Debit Profit and Loss and credit Provision for Doubtful Debts. In the Statement of Financial Position, the provision is deducted from Accounts Receivable.
Provision for Doubtful Debts Computation
Particulars
RM
Accounts Receivable
20,000
Provision for Doubtful Debts (5% x 20,000)
1,000
General Journal
Date
Particulars
Debit (RM)
Credit (RM)
2023 Dec 31
Profit and Loss
1,000
Provision for Doubtful Debts
1,000
(Creating provision for doubtful debts)
Total
1,000
1,000
Statement of Financial Position (extract)
Particulars
RM
RM
Current Assets
Accounts Receivable
20,000
Less: Provision for Doubtful Debts
1,000
Net Accounts Receivable
19,000
Answer
The Provision for Doubtful Debts is RM1,000 and is recorded as an expense in the Profit and Loss Account. Net Accounts Receivable in the Statement of Financial Position is RM19,000.
Where marks are usually lost
Example 5: Example 5: Straight-Line Depreciation
Question
Solution plan
The straight-line method charges depreciation on cost each year. Calculation: 10% x RM10,000 = RM1,000. Debit Depreciation (expense) and credit Accumulated Depreciation. Depreciation RM1,000 is taken to the Profit and Loss Account. Accumulated Depreciation is deducted from the machine's cost in the Statement of Financial Position: RM10,000 - RM1,000 = RM9,000 (net book value).
Depreciation Computation
Particulars
RM
Cost of machine
10,000
Depreciation (10% x 10,000)
1,000
General Journal
Date
Particulars
Debit (RM)
Credit (RM)
2023 Dec 31
Depreciation
1,000
Accumulated Depreciation
1,000
(Recording depreciation of machine)
Total
1,000
1,000
Statement of Financial Position (extract)
Particulars
RM
RM
Non-Current Assets
Machine (cost)
10,000
Less: Accumulated Depreciation
1,000
Net Book Value
9,000
Answer
Depreciation for 2023 is RM1,000 and is recorded as an expense in the Profit and Loss Account. The net book value of the machine in the Statement of Financial Position is RM9,000.
Where marks are usually lost
Example 6: Example 6: Disposal of a Non-Current Asset for Cash
Question
Solution plan
Net book value = Cost - Accumulated Depreciation = RM20,000 - RM12,000 = RM8,000. The selling price of RM9,000 exceeds the book value, so there is a profit of RM1,000. In the Disposal Account: debit the vehicle cost RM20,000; credit Accumulated Depreciation RM12,000 and Bank RM9,000. The profit of RM1,000 is transferred to the credit of the Profit and Loss Account.
General Journal
Date
Particulars
Debit (RM)
Credit (RM)
2023 Dec 31
Disposal of Vehicle
20,000
Vehicle
20,000
Dec 31
Accumulated Depreciation
12,000
Disposal of Vehicle
12,000
Dec 31
Bank
9,000
Disposal of Vehicle
9,000
Total
41,000
41,000
Disposal of Vehicle Account
Date
Particulars
RM
Date
Particulars
RM
Dec 31
Vehicle
20,000
Dec 31
Accumulated Depreciation
12,000
Dec 31
Profit and Loss (profit)
1,000
Dec 31
Bank
9,000
Total
21,000
Total
21,000
Profit and Loss Account (extract)
Particulars
RM
Add: Other Income / Gains
Profit on disposal of vehicle
1,000
Answer
The net book value of the vehicle is RM8,000. As it is sold for RM9,000, there is a profit on disposal of RM1,000, recorded as income in the Profit and Loss Account.
