Adjustments, Accruals, Prepayments and Bad Debts
Adjustments, Accruals, Prepayments and Bad Debts
This domain tests year-end adjustments that apply accruals accounting and prudence. Adjustments move amounts between the statement of profit or loss and the statement of financial position.
Core adjustments
- Accrued expense: incurred but unpaid, so add to the expense and show a liability.
- Prepaid expense: paid but not incurred, so reduce the expense and show a current asset.
- Accrued income: earned but not received, so add income and show a receivable.
- Bad debt: written off because recovery is unlikely; reduce receivables and charge the expense.
- Provision for doubtful debts: an estimate based on remaining receivables after write-offs.
- Depreciation and closing inventory are also period-end adjustments.
Worked example
Receivables are ₦500,000. A debt of ₦20,000 is written off, leaving ₦480,000. A 5% provision is required, which is ₦24,000. Net receivables are ₦480,000 − ₦24,000 = ₦456,000. If there was no opening provision, the profit-or-loss charge is ₦20,000 bad debt plus ₦24,000 provision = ₦44,000. The provision is an estimate, not a cash payment.
Traps that cost marks
- Treating a provision as money set aside in cash.
- Calculating the provision before deducting the bad debt write-off.
- Reversing accrued and prepaid items.
- Recording a bad debt recovery as a new credit sale.
- Forgetting that closing inventory reduces cost of sales.