How to approach it
- Set up both statement formats first, then a numbered working for every adjustment.
- For each adjustment write the double entry before touching the statements, so both sides land.
- Cross-check: the SOFP must balance. If it doesn't, scan your workings for one-sided entries.
- Leave 35–40 minutes for this question; attempting it last with 15 minutes left is how most candidates failed it.
Key rules to apply
- Accruals basis: expenses belong to the period that benefits; part-paid contracts need both a prepayment and an accrual review.
- Interest income accrues over time; remove any receipt wrongly booked to revenue.
- Disposal: remove cost and accumulated depreciation; recognise proceeds receivable and the gain or loss.
- Revaluation increase reverses an earlier loss through profit or loss first; any excess goes to OCI.
- Allowance for doubtful debts: charge only the movement in the allowance.
Answer layout
| Adjustment | Dr | Cr | P&L effect | SOFP effect |
|---|---|---|---|---|
| 1 | ||||
| 2 | ||||
| … |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Adjusting profit without the matching asset, liability or equity entry (examiners' main point).
- Treating a rent prepayment as the whole year's expense and missing the accrued part.
- Not reversing deposit interest booked to sales, or missing the final months' accrued interest.
- Crediting the whole revaluation gain to surplus when part reverses an earlier P&L loss.
- Charging the full closing allowance rather than the movement.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q8 without copying it.
Original practice question
Four year-end adjustments
Draft figures at 31 December 2025 (Rs m): (1) A rent contract for 1 October 2025–30 September 2026 costs Rs 36m a year; 30% (Rs 10.8m) was paid in advance and recorded as a prepayment, the rest is due at the end of the contract. (2) A Rs 100m deposit was placed on 1 July 2025 at 10% a year, interest paid half-yearly; nothing is recorded. (3) Land carried at Rs 180m after an earlier revaluation loss of Rs 15m charged to P&L is revalued to Rs 210m. (4) The allowance for doubtful debts is Rs 6m; receivables are Rs 200m, of which Rs 15m needs a specific Rs 3m allowance, and a 4% general allowance applies to the rest.
Required: Calculate the effect of each adjustment.
Worked solution
| Adjustment | Double entry | P&L | SOFP |
|---|---|---|---|
| (1) Rent | Dr Rent expense 9.0 / Cr Prepayment 9.0 | Expense 36 × 3/12 = 9.0 | Prepayment 10.8 − 9.0 = 1.8 |
| (2) Interest | Dr Interest receivable 5.0 / Cr Interest income 5.0 | Income 100 × 10% × 6/12 = 5.0 | Receivable 5.0 |
| (3) Land | Dr Land 30 / Cr P&L 15, Cr Revaluation surplus 15 | Gain 15.0 | Land 210; surplus 15 |
| (4) Allowance | Dr Impairment expense 4.4 / Cr Allowance 4.4 | Expense 4.4 | Allowance 3 + 4% × 185 = 10.4 |
Answer: Profit increases by 5.0 + 15.0 − 9.0 − 4.4 = Rs 6.6m; OCI Rs 15m; every entry also moves a balance sheet line.