Also in accounting, the adjusted trial balance includes all ending balances after all required accounting adjustments have been made to each account prior to preparation of the financial statement. It provides an accurate picture of a company’s financial health. These are statements that aid in making better decisions in finance. They also assist in accurate calculation of financial statement analysis ratios. These ratios only work if the data is accurate. Which is why changes in accounting matter. Now, we will learn the explanation of the entire concept of financial statement with adjustment in a detailed way
What is Financial Statement?
A financial statement is a type of report. It reveals a business the financial performance and position. It consists of a profit and loss account, balance sheet and cash flow statement. It tells the people whether the business is in profit or loss. It also indicates how much assets does business has and how much it owes.
Why Do We Need Financial Statement Adjustments?
To ensure smooth operation, businesses record a lot of transactions. Some are incomplete by the end of the year. Rent, for instance, may be owed but unpaid or income earned but not yet received. Before we prepare the financial statement we need to document these. This is known as making adjustments to financial statements.
They show income and expense correctly in the adjusted financial statements. These are also more reliable than raw data. They include what the company actually made or spent in a year. This allows investors, business owners, and tax officers to have faith in the numbers.
There is no financial statement preparation without these. Even ratio analysis of financial statements such as net profit ratio or return on capital employed will get incorrect results unless the figures are adjusted.
Preparing Financial Statement with Adjustment
There are some fixed steps to follow in order to prepare financial statement with adjustment. These actions ensure that each and every adjustment entries in accounting have been implemented accurately.
Step 1: Journalize all transactions
Record All Business Transactions — The journal is where every business transaction is initially written. Sales, purchases, expenses, and incomes are all included in this. Make sure to record in the appropriate accounts.
Step 2: Posting Statement of Ledger Accounts
Once the journal is posted, enter each posting into the appropriate ledger account. This assists in clustering similar transactions. That is, in the Sales Ledger, all sales; in the Salary Ledger, all salaries.
Step 3: Prepare Trial Balance
Trial Balance is a list of all ledger account balances. This is useful for verifying whether debits match credits. If not, errors exist.
Step 4: Enter Adjustment Journal Entries
Adjustment Entries in Accounting Now we seen adjustment entries in accounting. These entries are made for:
On your case, there are no payments made.
- Paid in advance expenses (also known as prepaid expenses)
- Accrued income (earned but not received)
- Unearned revenue (income received before it is earned)
- Lowered the price for us (depreciation in the value of the asset)
- All of these need to be added properly.
Here are some examples of accounting adjustments:
| Particular | Adjustment Type | Example |
| Rent unpaid | Outstanding expense | Add as expense and liability |
| Salary paid in advance | Prepaid expense | Reduce expense, add asset |
| Commission earned but not received | Accrued income | Add to income and asset |
| Advance fees received | Unearned income | Reduce income, add liability |
| Machinery loss in value | Depreciation | Add expense and reduce asset |
| Customer will not pay | Bad debts | Reduce asset and add expense |
Step 5: Create Adjusted Trial Balance
Now, you will need to prepare a new trial balance. It has everything playing out with all the tweaks. Adjusted trial balance: This is known as an adjusted trial balance. This makes sure that the final accounts now reflect the real financial situation. Prepare Final accounts by using the Adjusted trial balance. These are:
- Trading Account
- Profit & Loss Account
- Balance Sheet
These final accounts with adjustment are called final adjusted accounts. They provide the ultimate snapshot of how the business did. This entire procedure is called invention of financial statements with changes.
Adjustments in Account in the Financial Statements
These adjustments in financial statements reveal them the real figures. These are performed at the year-end. Let’s look at them in detail.
Outstanding Expenses
Overhead such as electricity, rent or wage sometimes goes unpaid. They were still the current year so we needed to book them. These are simply corrections to the financial statements.
Example: Rent due ₹5,000 Increase rent expense by ₹5,000 and recognize ₹5,000 as liability.
Prepaid Expenses
In some situations, businesses pay in advance. Like insurance for next year. We take that expense down for this year and put it on the books as an asset.
Insurance Example: ₹12,000, ₹3,000 prepaid We will reduce expense by ₹3,000 And show ₹3,000 as prepaid asset.
Accrued Income
Income not yet received is also included. It is shown as an asset.
For instance: Interest earned ₹2,000, not received yet Include ₹2,000 as income under interest, ₹2,000 as asset.
Income Received in Advance
Next year if business gets money for the service it is not income yet. We deduct it from income and account for it as a liability. For example: Receive ₹10,000 fees for the next year Deduct ₹10,000 from income, concede ₹10,000 as advance received.
Depreciation
Machinery and other fixed assets depreciate every year. We lower this value and charge that as an expense.
Example: Machinery ₹1,00,000 Depreciation 10% ₹10,000 minus machinery, ₹10,000 plus expense.
Bad Debts
Some customers may not pay. We need to have that amount written off.
A straightforward example: ₹3,000 unrecovered Debit sundry debtors by 3,000. Credit bad debt expense by 3,000. Final accounts are adjusted as its attachment for completion of reports. They assist correctly financial statement analysis ratios.
The Format of the Financial Statements After Adjustments
Then finally we have adjusted financial statements. Financial statements after adjustments — Gain perspective into financial statements after adjustments
Trading and profit & loss account format
This account shows the business’s gross and net profit. It has all the adjusted income and expense.
| Trading Account:Sales (add accrued)Less: Cost of Sales (adjust purchases and opening and closing stock)Profit & Loss Account:All overhead (add accrual / reduce deferral)Indirect revenues (add accrued or decrease received in advance)Also reflected in here, line item for “depreciated and bad debts” |
Balance Sheet Format
The Balance Sheet is drafted once all adjustments in the Financial statements are been made.
Assets Side Includes
- Name it: fixed assets (less accumulated depreciation)
- Current assets(cash, modified debtors, accrued income, wages in advance)
Liabilities Side Includes
- Enterprise (add profit, subtract drawings)
- Account payable (adjusted creditors, current liabilities, outstanding expenses, advance incomes)
Here’s a simple format table:
| Liabilities | ₹ | Assets | ₹ |
| Capital | Fixed Assets (less dep) | ||
| Add: Profit | Current Assets | ||
| Less: Drawings | Adjusted Debtors | ||
| Outstanding Expenses | Prepaid Expenses | ||
| Advance Income | Accrued Income | ||
| Creditors | Cash | ||
| Total | Total |
Such financial statements are referred to as adjusted financial statements. They are final and available for management, banks, or tax agencies to utilize.
They help in clear overview of business ability. They also assist in analyzing ratios of financial statements correctly. Such ratios are current ratio, net profit ratio, return on equity etc. They only get used after you’re done preparing financial statements FAQ.
Relevance to ACCA Syllabus
Accounting in Financial Statements with Adjustment ACCA Financial Reporting Financial statements with adjustment is a fundamental constituent of ACCA syllabus for SAP/[SBR paper] Financial reporting. They should have a knowledge of the accounting adjustments, which include accrued revenue and expenses, earned revenue and expenses, depreciation, provisioning, and correction of errors. These adjustments are necessary because financial statements prepared under local GAAP may differ from those prepared under IFRS, and they help to align local GAAP financial statements with IFRS reporting requirements to provide a true and fair view of the financial position of a company.
Financial Statement with Adjustment ACCA Questions
Q 1: What adjustment would be made to record expenses in the correct accounting period? A) Revenue recognition
B) Accruals
C) Depreciation
D) Capitalization
Ans: B) Accruals
Q2: An electric bill was received in April 2025 for March 2025. In preparing the financial statements for the year ended 31 March 2025, which of the following would require an adjustment? A) Prepayment of ₹20,000
B) Accrual of ₹20,000
C) Depreciation of ₹20,000
D) No adjustment needed
Ans: B) Accrual of ₹20,000
Q3: A car that costs ₹10,00,000 has an effective life of 5 years and no residual value. * Calculate the annual straight line depreciation expense. A) ₹50,000
B) ₹1,00,000
C) ₹2,00,000
D) ₹5,00,000
Ans: C) ₹2,00,000
Q4: If no closing inventory is included at year-end, what is the effect? A) Profit will be understated
B) Profit will be overstated
C) Cash will be overstated
D) Revenue will not be properly respected
Ans: A) Profits underreport
Q5: What sort of adjustment type is required when customer paid in advance for services to be provided next year? A) Revenue recognition
B) Provision for bad debts
C) Deferred income
D) Accrued income
Ans: C) Deferred income
Relevance to CMA Syllabus
Adjustments in the financial statement are topics that are important to financial statement reporting professionals (many of them are US CMA candidates) discussed in Part 1: Financial Planning, Performance, and Analytics and Part 2: Strategic Financial Management. This will require a comprehensive understanding of the accounting topics including accrual accounting, prepayments, depreciation and provisions, and it is important that you understand how to do so in order to accurately review the financial analysis and obtain performance measures.
Financial Statement with Adjustment CMA Questions
Q1: A Company has collected ₹1,50,000 as advance rent for 3 months. How to Adjust the First Month Correctly A) ₹1,50,000 revenue
B) ₹50,000 deferred revenue
C) ₹1,00,000 deferred revenue
D) ₹1,50,000 liability
Ans: B) ₹50,000 amounts received and recognized as unearned income
Q2: Which of the following methods of depreciation generates a greater expense early in an asset’s life?
A) Straight-line
B) Declining balance
C) Units of production
D) Sinking fund
Ans: B) Declining balance
Q3: What do we need adjusting entries at the end of an accounting period? A) To reconcile bank balances
B) To reconcile revenue and expenditure
C) Cash flow statements
D) To audit inventory
Ans: B) To match revenues to expenses
Q4: A firm pays an insurance premium of ₹1,20,000 in January for one year. What is the prepaid expense at the end of 3 months?
A) ₹1,20,000
B) ₹30,000
C) ₹90,000
D) ₹0
Ans: C) ₹90,000
Q5: Services have been provided but not yet billed (adjusting Journal Entry) A) Unearned revenue
B) Accrued revenue
C) Deferred expense
D) Provision
Ans: B) Accrued revenue
Relevance to US CPA Syllabus
Adjustments in financial statements is one of the most essential areas under the umbrella of US CPA Exam (mostly covered under Financial Accounting and Reporting [FAR]). Candidates will also use GAAP principles to understand accruals, prepayments, depreciation, provisions, and errors as they relate to both private and public companies.
Financial Statement with Adjustment CPA Questions
Q1: What is credited when it records an accrued expense?
A) Cash
B) Prepaid Expense
C) Expense Payable
D) Unearned Revenue
Ans: C) Expense Payable
Q2) When does depreciation expense show on the financial statements?
A) When the assets were bought
B) On sale of the asset
C) During the year, as the property is utilized
D) Only when cash is paid
Ans: C) Annually as the asset is used
Q3: One business did not recognize an accrued expense What is the result? A) Net income is understated
B) Liabilities are overstated
C) Assets are overstated
D) Net income is overstated
Ans: D) Net income overstated
Q4: What is unearned revenue a component of? A) Asset
B) Equity
C) Liability
D) Expense
Ans: C) Liability
Q5: Which of the following is not a typical adjusting entry? A) Depreciation
B) Accruals
C) Prepaid expenses
D) Inventory purchases
Ans: D) Inventory purchases
Relevance to CFA Syllabus
Adjustments Impact on Accuracy and Presentation of Financial Statements Financial Reporting and Analysis CFA Level I. This involves grapsing when and why to recognize revenue and expenses, depreciation, and other concepts specific to accrual-based accounting.
Financial Statement with Adjustment CFA Questions
Q1: What is the main purpose of adjusting entries?
A) To balance the books
B) to ensure that you have cash coming in to counter cash going out
C) To match income and expenditures to the appropriate period
D) For calculating dividend payments
Ans: C) To match the income and reductions in a period
Q2: Which of the following accounts need to be adjusted at year-end under accrual? A) Cash
B) Accounts Receivable
C) Accrued Expenses
D) Retained Earnings
Ans: C) Accrued Expenses
Q3: A business does not show depreciation. What is the impact on net income?
A) Overstated
B) Understated
C) No impact
D) Loss of net income
Ans: A) Overstated
Q4: A client pays in advance for the service for the annual period that is provided to them. What does 3 months of earned revenue look like?
A) ₹3,00,000
B) ₹75,000
C) ₹2,25,000
D) ₹0
Ans: B) ₹75,000
Q5: Which of the following is the best description of accrued revenue? A) Cash received in advance
B) Income that hasn’t been billed but is already on the books
C) Paid but unused expense
D) Adjusting entry to the retained earnings
Ans: B) Earned but unbilled income
