The most common question in the Institute’s Financial Reporting paper is the compulsory question that gives a trial balance and a list of year-end adjustments and asks for the statement of profit or loss, the statement of changes in equity and the statement of financial position. It carries 30 marks and has appeared in every diet reviewed.
The accounting is not hard, but the time is short and one missed adjustment can upset several figures. This topic sets out a reliable method, then goes through the straightforward adjustments a company meets: accruals and prepayments, closing inventory, depreciation, receivables, loan interest, tax and shares issued. The next topic adds the more complex adjustments: revaluations, deferred tax, leases and assets held for sale.
The method is tested in the compulsory question in each diet: November Diet, 2021, Question 1 (a statement of comprehensive income for 10 marks, a statement of changes in equity for 5 and a statement of financial position for 10), and November Diet, 2023, Question 1 (damaged inventory, loan interest and a share issue). Read categories, subtotals and management-defined performance measures first.
In 30 seconds
Read the adjustments first, then do the double entry on the question paper without copying out the trial balance. Draft pro formas for the three statements, copy the figures with a bracketed working beside every adjusted figure, find profit, complete the statement of changes in equity, and finish the statement of financial position.
Typical adjustments: accruals add to expense and create a liability; prepayments cut expense and create an asset; closing inventory at the lower of cost and net realisable value; depreciation; the movement in the allowance for receivables; accrued loan interest; tax; and shares issued at a premium. The check: total assets equal total equity and liabilities.
A reliable method
- Mark the adjustments. Tick each one on the trial balance as you deal with it, so none is missed or done twice.
- Do not rewrite the trial balance. Write each adjustment beside the line it affects, with a reference letter, and open extra accounts (accruals, prepayments, depreciation expense) in any space.
- Show workings. If a number on the statement is the result of an adjustment, show the arithmetic in brackets on the face or in a numbered working, so the marker can award method marks even if the figure is wrong.
- Check the totals. The statement of financial position must balance. If it does not, the error is usually a missed double entry, such as an accrual shown on one side only.
The straightforward adjustments
- Accrued expenses. An expense for the period not yet paid: Dr Expense, Cr Accruals (current liability). Wages of ₦5,000 owed at the year end add ₦5,000 to the expense.
- Prepayments. A payment for next period: Dr Prepayments (current asset), Cr Expense. Rent of ₦4,000 paid in advance is taken out of this year’s rent expense.
- Closing inventory. Closing inventory reduces cost of sales and appears as a current asset, at the lower of cost and net realisable value. Damaged goods are valued at net realisable value: if ₦10,000 of inventory has a net realisable value of ₦6,000, the closing figure is reduced by ₦4,000.
- Depreciation. Dr Depreciation expense, Cr Accumulated depreciation. Charge it as the question says (rate, method and which expense it belongs to). On a cost of ₦500,000 at 10% straight line the charge is ₦50,000.
- Receivables. A debt written off is an expense and reduces receivables. The allowance is set as a percentage of the remaining receivables, and the charge in profit or loss is only the change in the allowance. A 5% allowance on receivables of ₦150,000 is ₦7,500, and against an opening ₦6,000 the charge is ₦1,500.
- Loan interest. Interest for the year is the rate × principal × the time outstanding. Interest paid is in the trial balance; the unpaid part is accrued as a finance cost and a current liability.
- Tax. The estimate for the year: Dr Tax expense, Cr Current tax payable. It is a current liability at the year end.
- Share issues. If proceeds are in a separate account, clear it: Cr Share capital at nominal value and Cr Share premium for the rest (see the topic on share issues). Dividends paid are deducted from retained earnings in the statement of changes in equity, not charged to profit.
An example
Kara Plc has this trial balance at 31 December 20X9 (₦ thousand). Debits: purchases 410,000; opening inventory 60,000; wages 120,000; distribution costs 45,000; administrative expenses 70,000; rent 24,000; property, plant and equipment at cost 500,000; trade receivables 150,000; bank 35,000; loan interest paid 4,000; dividend paid 20,000. Credits: revenue 800,000; accumulated depreciation 140,000; allowance for receivables 6,000; trade payables 85,000; 8% loan notes issued on 1 January 100,000; share capital 200,000; proceeds of share issue 30,000; retained earnings at 1 January 77,000. Both sides total ₦1,438,000.
Adjustments: (a) closing inventory is ₦75,000, including goods with a cost of ₦10,000 and a net realisable value of ₦6,000; (b) depreciation is 10% of cost, 60% to cost of sales and 40% to administrative expenses; (c) wages of ₦5,000 are accrued; (d) rent of ₦4,000 is prepaid; (e) the allowance is to be 5% of receivables; (f) loan interest for the full year is to be accrued; (g) the share issue was 20,000 shares of ₦1 at ₦1.50; (h) tax is 30% of profit before tax.
| Statement of profit or loss, ₦ thousand | |
|---|---|
| Revenue | 800,000 |
| Cost of sales (60,000 + 410,000 − 71,000 + 120,000 + 5,000 + 30,000) | (554,000) |
| Gross profit | 246,000 |
| Distribution costs | (45,000) |
| Administrative expenses (70,000 + 20,000 + 20,000 + 1,500) | (111,500) |
| Finance costs (4,000 paid + 4,000 accrued) | (8,000) |
| Profit before tax | 81,500 |
| Tax at 30% | (24,450) |
| Profit for the year | 57,050 |
Closing inventory is ₦75,000 − (₦10,000 − ₦6,000) = ₦71,000. The administrative expenses include rent of ₦24,000 − ₦4,000 and the allowance increase of ₦1,500.
| Statement of changes in equity, ₦ thousand | Capital | Premium | Retained earnings | Total |
|---|---|---|---|---|
| Balance at 1 January | 200,000 | 77,000 | 277,000 | |
| Issue of shares | 20,000 | 10,000 | 30,000 | |
| Profit for the year | 57,050 | 57,050 | ||
| Dividends | (20,000) | (20,000) | ||
| Balance at 31 December | 220,000 | 10,000 | 114,050 | 344,050 |
| Statement of financial position, ₦ thousand | |
|---|---|
| Property, plant and equipment (500,000 − 140,000 − 50,000) | 310,000 |
| Inventories | 71,000 |
| Trade receivables (150,000 − 7,500) | 142,500 |
| Prepayments | 4,000 |
| Bank | 35,000 |
| Total assets | 562,500 |
| Equity | 344,050 |
| 8% loan notes (non-current) | 100,000 |
| Trade payables 85,000, accruals 5,000, loan interest 4,000, tax 24,450 | 118,450 |
| Total equity and liabilities | 562,500 |
The ideas in more depth
Why the double entry is done on the question
Copying out a trial balance wastes time and invites copying errors. Every adjustment has two sides, and writing both beside the figures they affect keeps the statements consistent, and the check that assets equal equity and liabilities then catches most slips.
Why the allowance charge is the movement
The allowance is a balance already carried forward. Charging the whole closing allowance each year would count the opening part twice. Only the increase (or a decrease credited) belongs to this year.
Sources and references
- International Accounting Standard (IAS) 1 Presentation of Financial Statements, IAS 2 Inventories, IAS 16 Property, Plant and Equipment and the standards on income taxes and financial instruments, for the adjustments in this topic.
These points are stated as at 5 November 2026.
Worked examples
Example 1: the adjustments. Use the Kara Plc data above. Required: closing inventory, the depreciation split and the allowance charge.
- Closing inventory.
₦75,000 − ₦4,000 write-down = ₦71,000. - Depreciation.
10% × ₦500,000 = ₦50,000: ₦30,000 to cost of sales, ₦20,000 to administrative expenses. - Allowance.
5% × ₦150,000 = ₦7,500
less opening ₦6,000 = charge ₦1,500.
Example 2: loan interest. ₦100,000 of 8% loan notes were issued on 1 January and ₦4,000 of interest has been paid. Required: the finance cost and the accrual.
- Finance cost.
8% × ₦100,000 = ₦8,000. - Accrual.
₦8,000 − ₦4,000 paid = ₦4,000, a current liability.
Example 3: the check. Required: whether the statement of financial position balances.
- Assets.
₦310,000 + ₦71,000 + ₦142,500 + ₦4,000 + ₦35,000 = ₦562,500. - Equity and liabilities.
₦344,050 + ₦100,000 + ₦118,450 = ₦562,500.
It balances.
How to answer in the exam
- Spend the first minutes reading. List every adjustment and what it affects.
- Allocate expenses as told. Depreciation and other costs go to cost of sales, distribution or administration as the question says.
- Label workings with numbers and refer to them on the face of the statements.
- Finish with the check. If the statement does not balance, look for a one-sided entry.
Common mistakes in the exam
- Charging the whole allowance for receivables instead of the movement.
- Forgetting that closing inventory affects both cost of sales and the statement of financial position.
- Not accruing the unpaid part of loan interest.
- Deducting dividends from profit instead of retained earnings.
- Leaving the proceeds of a share issue in a suspense account.
- Charging depreciation to the wrong expense heading.
Quick revision
- Read first; do double entry on the question; pro formas; workings; profit; equity statement; balance check.
- Accrual: expense up, liability. Prepayment: expense down, asset.
- Inventory at lower of cost and net realisable value. Allowance: charge the movement.
- Interest: rate × principal × time; accrue the unpaid part. Share issue: nominal to capital, excess to premium.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. In a trial balance question the best first step is to:
- Copy out the trial balance in full
- Read the requirements and adjustments, then do the double entry on the question paper
- Prepare the statement of financial position first
- Calculate the tax
Show the answer
B. This saves time and avoids copying errors.
Question 2. An accrued expense:
- Increases the expense and creates a current liability
- Reduces the expense
- Creates an asset
- Reduces profit only in the next year
Show the answer
A. The cost belongs to this period although unpaid.
Question 3. A prepayment:
- Is a liability
- Increases this year’s expense
- Reduces the expense and creates a current asset
- Is added to equity
Show the answer
C. The cost belongs to next period.
Question 4. Damaged inventory is included in closing inventory at:
- Cost
- Selling price
- Zero
- The lower of cost and net realisable value
Show the answer
D. The write-down reduces closing inventory and profit.
Question 5. The charge for the allowance for receivables is:
- The whole closing allowance
- The movement in the allowance
- The opening allowance
- Nil
Show the answer
B. Plus any debts written off.
Question 6. Depreciation:
- Is an expense and increases accumulated depreciation
- Is a cash payment
- Reduces equity directly
- Is an asset
Show the answer
A. It is a non-cash expense.
Question 7. Shares of ₦1 issued at ₦1.50 are recorded as:
- All share capital
- All premium
- Capital at nominal value and premium for the excess
- Profit
Show the answer
C. Premium of ₦0.50 per share.
Question 8. Loan interest not yet paid at the year end is:
- Ignored
- Added to the loan
- Treated as a dividend
- Accrued as a finance cost and a current liability
Show the answer
D. The finance cost is rate × principal × time.
Question 9. Dividends paid are shown:
- In revenue
- In cost of sales
- As a deduction from retained earnings in the statement of changes in equity
- As an asset
Show the answer
C. They are not an expense.
Question 10. A final check on the statement of financial position is that:
- Total assets equal total equity and liabilities
- Profit equals cash
- Inventory equals receivables
- Tax equals dividends
Show the answer
A. A difference points to a one-sided entry.
Section B style: written questions
Question 11 (10 marks). (a) State the steps in preparing financial statements from a trial balance. (5 marks) (b) State the double entry for an accrued expense, a prepayment and depreciation. (5 marks)
Question 12 (15 marks). A company’s trial balance shows wages ₦80,000, rent ₦30,000, trade receivables ₦90,000, an opening allowance for receivables of ₦3,000, and property, plant and equipment at cost ₦200,000 with accumulated depreciation ₦60,000. Adjustments: wages of ₦6,000 are accrued; rent of ₦5,000 is prepaid; a debt of ₦2,000 is to be written off and the allowance is to be 4% of the remaining receivables; depreciation is 20% on the reducing balance.
Calculate the profit or loss charge for each of wages, rent, receivables and depreciation. (4 marks each, 3 for presentation)
A further written question
Question 13 (20 marks). Lekki Plc has this trial balance at 31 December (₦ thousand). Debits: purchases 300,000; opening inventory 40,000; wages 90,000; administrative expenses 50,000; property, plant and equipment at cost 400,000; receivables 80,000; bank 20,000; loan interest paid 3,000. Credits: revenue 600,000; accumulated depreciation 100,000; payables 55,000; 10% loan notes issued on 1 January 60,000; share capital 150,000; retained earnings at 1 January 18,000.
Adjustments: closing inventory ₦55,000; depreciation 10% of cost; interest for the year to be accrued; administrative expenses of ₦2,000 accrued; tax ₦15,000. Wages are treated as administrative expenses.
(a) Prepare the statement of profit or loss. (10 marks)
(b) Prepare the statement of financial position. (8 marks)
(c) State the check that confirms the statement balances. (2 marks)
Model answers
Show the model answer to Question 11
(a) (1 mark each) Read the requirements and adjustments; do the double entry on the question paper; draft pro formas; copy the figures with workings for adjusted items; calculate profit, complete the statement of changes in equity and the statement of financial position, and check that they balance.
(b) Accrued expense: Dr Expense, Cr Accruals (liability) (1.5). Prepayment: Dr Prepayments (asset), Cr Expense (1.5). Depreciation: Dr Depreciation expense, Cr Accumulated depreciation (2).
Show the model answer to Question 12
Wages: ₦80,000 + ₦6,000 = ₦86,000 (4). Rent: ₦30,000 − ₦5,000 = ₦25,000 (4). Receivables: after the write-off ₦90,000 − ₦2,000 = ₦88,000; allowance 4% = ₦3,520; movement ₦3,520 − ₦3,000 = ₦520; charge ₦2,000 + ₦520 = ₦2,520 (4). Depreciation: (₦200,000 − ₦60,000) × 20% = ₦28,000 (3). Presentation (1).
Show the model answer to Question 13
(a)
- Revenue ₦600,000 (1).
- Cost of sales ₦40,000 + ₦300,000 − ₦55,000 = ₦285,000 (2); gross profit ₦315,000 (1).
- Administrative expenses ₦50,000 + ₦90,000 + depreciation ₦40,000 + accrual ₦2,000 = ₦182,000 (3).
- Finance costs 10% × ₦60,000 = ₦6,000 (1).
- Profit before tax ₦127,000 (1).
- Tax ₦15,000; profit ₦112,000 (1).
(b)
- Property, plant and equipment ₦400,000 − ₦100,000 − ₦40,000 = ₦260,000 (1.5); inventories ₦55,000 (0.5); receivables ₦80,000 (0.5); bank ₦20,000 (0.5); total assets ₦415,000 (1).
- Equity.
share capital ₦150,000 + retained earnings (₦18,000 + ₦112,000 = ₦130,000) = ₦280,000 (2). - Loan notes ₦60,000 (0.5).
- Payables ₦55,000, accruals ₦2,000, loan interest ₦3,000, tax ₦15,000 (1.5).
- Total ₦415,000 (0).
(c) Total assets must equal total equity and liabilities (2); a difference indicates a one-sided entry or an omitted adjustment.
Pathfinder on Company financial statements from a trial balance (i): technique and adjustments
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The compulsory question gives a trial balance with adjustments for damaged inventory, shares issued, dividends, an allowance for receivables, depreciation, accrued expenses and tax, and asks for the statement of comprehensive income (10 marks), the statement of changes in equity (5 marks) and the statement of financial position (10 marks).
Revise first: The straightforward adjustments
The compulsory question includes inventory with wrong packaging valued at net realisable value, loan interest accrued for six months, a restructuring cost and shares issued with proceeds recorded separately.
Revise first: The straightforward adjustments
The compulsory question includes irrecoverable debts and an allowance on continuing receivables, depreciation split between cost of sales and administrative expenses, and a suspense balance for shares issued.
Revise first: A reliable method
Source: ICAN Pathfinder, Financial Reporting. Diets covered: Every diet in the Pathfinder, from November Diet, 2021 to May Diet, 2026, was reviewed here. The compulsory question in each diet tests this method..
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