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Adjustments and the Matching Principle

5 dot points across 5 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

How do we adjust an expense account for amounts owed or paid in advance at the year end?

Adjust expense accounts for accruals and prepayments and show them in the financial statements
A focused answer to the O-Level Principles of Accounts outcome on accrued and prepaid expenses. Adjusting the expense account, the closing balances as a liability or asset, and the figures shown in the financial statements.
9 min answer →

How do we adjust an income account for amounts earned but not received, or received in advance, at the year end?

Adjust income accounts for accrued and prepaid income and show them in the financial statements
A focused answer to the O-Level Principles of Accounts outcome on accrued and prepaid income. Adjusting an income account such as rent received, the closing balances as an asset or liability, and the financial statement figures.
8 min answer →

Why is the cost of a non-current asset spread over its useful life, and how do the straight-line and reducing-balance methods work?

Calculate depreciation using the straight-line and reducing-balance methods and record it
A focused answer to the O-Level Principles of Accounts outcome on depreciation. Why assets are depreciated, the straight-line and reducing-balance methods, the double entry, and the carrying amount in the statements.
9 min answer →

How do we account for a customer's debt that will not be paid, and for the risk that some others may not pay?

Write off irrecoverable debts and create or adjust an allowance for doubtful debts
A focused answer to the O-Level Principles of Accounts outcome on bad debts. Writing off an irrecoverable debt, creating and adjusting the allowance for doubtful debts, and the effect on profit and on receivables.
9 min answer →

Why must income and the expenses that earned it be recognised in the same period, regardless of when cash moves?

Explain the matching principle and the accrual basis, and why year-end adjustments are needed
A focused answer to the O-Level Principles of Accounts outcome on matching. The accrual basis versus cash basis, matching expenses to the income they help earn, and why adjustments are made at the year end.
7 min answer →