Accountancy: Financial Reporting Fundamentals and Adjustments
Core concepts
Candidates must be fluent in the accounting equation (assets = liabilities + capital), the accrual and going-concern assumptions, and the qualitative characteristics of useful information (relevance, faithful representation, comparability, verifiability, timeliness, understandability). Know the double-entry mechanics behind depreciation, accruals, prepayments, bad and doubtful debts, inventory valuation, and the distinction between capital and revenue expenditure. Be able to move from a trial balance to a statement of profit or loss and a statement of financial position, and to prepare simple consolidated statements.
Traps in questions
- Accrual vs cash timing. An expense incurred but unpaid is a liability, not a payment. A prepayment is an asset, not an expense.
- Depreciation is allocation, not valuation. It does not create a fund for replacement.
- Provision vs contingent liability. A provision is recognised when a present obligation is probable and reliably measurable; a contingent liability is only disclosed.
- Capital vs revenue. Wrong classification misstates both profit and asset carrying amounts.
- Direction of entries. Read whether the question asks for the effect on profit or on the statement of financial position.
Rule of thumb
For any adjustment, ask: has the cash moved, and has the benefit or obligation arisen? If benefit/obligation exists without cash, accrue or prepay accordingly.
Worked example
A business pays rent of KES 240,000 for 12 months on 1 October, and the year ends 31 December. Three months relate to the current year, so charge 240,000 × 3/12 = KES 60,000 to profit or loss and carry KES 180,000 as a prepayment (current asset).