SingaporeAccountingSyllabus dot point

How does each year-end adjustment flow through both the income statement and the statement of financial position?

Show the effect of year-end adjustments on the income statement and statement of financial position

A focused answer to the O-Level Principles of Accounts outcome on the dual effect of adjustments. How accruals, prepayments, depreciation and irrecoverable debts each change both the income statement and the statement of financial position.

Generated by Claude Opus 4.89 min answerUpdated 2026-06-06

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking
The answer
Examples in context
Try this

What this dot point is asking

SEAB wants you to show the effect of each year-end adjustment on both the income statement and the statement of financial position. The central insight is the dual effect: every adjustment is a double entry, so it touches two accounts, and those two almost always fall one in each statement. Master the pairing and you can adjust a draft profit and a draft position together.

The answer

Why adjustments hit both statements

Each adjustment is recorded by double entry, so it has two sides. One side is usually an income or expense (income statement) and the other an asset or liability (statement of financial position). Change the profit and you simultaneously change the position.

The four common adjustments

Adjustment	Income statement effect	Statement of financial position effect
Accrued expense	Expense up - profit down	Current liability created
Prepaid expense	Expense down - profit up	Current asset created
Accrued income	Income up - profit up	Current asset created
Income in advance	Income down - profit down	Current liability created
Depreciation	Expense up - profit down	Accumulated depreciation up (carrying amount down)
Irrecoverable debt written off	Expense up - profit down	Receivables down
Increase in allowance for doubtful debts	Expense up - profit down	Net receivables down

Adjusting a draft profit

When a draft profit is given before adjustments, work through each one:

Add to profit: prepaid expenses, accrued income, a decrease in the allowance.
Subtract from profit: accrued expenses, income in advance, depreciation, irrecoverable debts, an increase in the allowance.

Then apply the matching balance-sheet effect of each.

Worked example

A draft profit of $\$ 50,000 $was found before adjustments. Apply: (1) wages accrued$ \ $2\,000$ ; (2) rent prepaid $\$ 900 $; (3) depreciation$ \ $4\,000$ ; (4) an increase in the allowance for doubtful debts of $\$ 500$. Find the corrected profit and the statement of financial position effects.

Step 1: Accrued wages

Wages expense rises $\$ 2,000 $, so profit falls$ \ $2\,000$ . In the statement, a $\$ 2,000$ current liability (accrued wages) is created.

Step 2: Prepaid rent

Rent expense falls $\$ 900 $, so profit rises$ \ $900$ . In the statement, a $\$ 900$ current asset (prepaid rent) is created.

Step 3: Depreciation and the allowance

Depreciation of $\$ 4,000 $raises expenses, so profit falls$ \ $4\,000$ ; accumulated depreciation rises, cutting the asset's carrying amount. The $\$ 500 $rise in the allowance raises expenses, so profit falls$ \ $500$ ; net receivables fall $\$ 500$.

Step 4: Compute the corrected profit

	$\$ $
Draft profit	50,000
Less accrued wages	(2,000)
Add prepaid rent	900
Less depreciation	(4,000)
Less increase in allowance	(500)
Corrected profit	44,400

Each adjustment also reshaped the statement of financial position, as set out above.

Examples in context

Example 1. A draft profit that shrinks once adjusted. A trader proudly notes a draft profit of $\$ 30,000 $, but has not yet charged$ \ $5,000$ depreciation, $\$ 1,000 $accrued wages and a$ \ $2,000$ bad debt. After these, profit is $\$ 22,000$ and the statement of financial position shows lower asset carrying amounts, a new liability and lower receivables. The adjustments give a truer, more prudent picture.

Example 2. A prepayment that flatters profit, fairly. A firm has prepaid $\$ 1,200 $of next year's insurance. Removing it from this year's expense raises profit by$ \ $1,200$ and creates a $\$ 1,200$ current asset. This is not window-dressing: the benefit belongs to next year, so matching correctly defers the cost and records the asset now.

Try this

Q1. State the two-statement effect of an accrued expense of $\$ 700$. [2 marks]

Cue. Income statement: expenses up $\$ 700 $, profit down$ \ $700$ . Statement of financial position: a $\$ 700$ current liability is created.

Q2. A draft profit is $\$ 25,000 $. Depreciation of$ \ $3,000$ has not been charged. State the corrected profit and the balance-sheet effect. [2 marks]

Cue. Corrected profit $= 25\,000 - 3\,000 = \$ 22,000 $; accumulated depreciation rises$ \ $3,000$ , lowering the asset's carrying amount.

Q3. Explain why writing off an irrecoverable debt affects both statements. [2 marks]

Cue. It is a double entry: an expense (irrecoverable debts) is charged in the income statement (profit down) and trade receivables are reduced in the statement of financial position.

Exam-style practice questions

Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Original8 marksA draft profit of

\

40\,000

was calculated before these adjustments: (1) rent of

1\,200

is accrued; (2) insurance of

\

600

is prepaid; (3) depreciation of

3\,000

has not been charged; (4) an irrecoverable debt of

\

800$ must be written off. (a) Calculate the corrected profit. (b) State how each adjustment affects the statement of financial position.

Show worked answer →

(a)

	$\$ $
Draft profit	40,000
Less accrued rent	(1,200)
Add prepaid insurance	600
Less depreciation	(3,000)
Less irrecoverable debt	(800)
Corrected profit	35,600

(b) Effects on the statement of financial position:

Accrued rent $\$ 1,200$: a current liability.
Prepaid insurance $\$ 600$: a current asset.
Depreciation $\$ 3,000$: increases accumulated depreciation, reducing the asset's carrying amount.
Irrecoverable debt $\$ 800$: reduces trade receivables.

Markers reward the correct direction of each profit adjustment, a corrected profit of $\$ 35,600$, and the matching effect of each adjustment on the statement of financial position.

Original5 marksExplain why every year-end adjustment affects both the income statement and the statement of financial position, using accrued expenses and depreciation as examples.

Show worked answer →

Every adjustment is a double entry, so it touches two accounts, and these usually fall one in each statement.

For an accrued expense, the expense is increased in the income statement (reducing profit) and a current liability is created in the statement of financial position. The two sides of the same entry appear in the two statements.

For depreciation, the depreciation expense is charged in the income statement (reducing profit) and accumulated depreciation increases in the statement of financial position (reducing the asset's carrying amount). Again, one entry, two statements.

Markers reward the double-entry reasoning and a correct two-statement effect for each of the accrued expense and depreciation.