An adjustment has two effects: one on profit in the income statement, and one on an asset or liability in the statement of financial position. If you record only one, the statements disagree by exactly that amount.
This page gives a tracing table and a worked example. It supports accruals and prepayments, and the double-entry and ledger trainer shows the two sides of each entry.
Why does tracing go wrong?
Most learning happens one statement at a time. The income statement is drawn, then the statement of financial position is drawn as a separate task. By then the adjustment has been forgotten, or you remember it only on the statement you were working on.
The fix is to handle each adjustment as a unit. Record both effects the moment you read the adjustment note.
A tracing table
For each adjustment, fill one row.
- State the event in words. What is owed, prepaid or owned?
- Income statement effect. Does the expense or income for the year go up or down, and by how much?
- Statement of financial position effect. Which asset or liability appears, and with what amount?
- Profit effect. Does profit go up or down?
- Balance check. Change in assets minus change in liabilities must equal change in profit.
Worked example
A trader’s net profit before adjustments is 14,000. Two notes are given at 31 December.
- Insurance of 1,200 was paid on 1 October for 12 months.
- Wages of 500 for December are owed and unpaid.
Adjustment 1, insurance. Three months (October to December) belong to this year: 1,200 × 3/12 = 300. The remaining 900 is prepaid.
Adjustment 2, wages. The year’s expense rises by 500. The 500 is a liability, accrued expenses.
| Adjustment | Income statement | Statement of financial position | Profit effect |
|---|---|---|---|
| Insurance | Expense reduced from 1,200 to 300 | Prepayment 900 (current asset) | +900 |
| Wages | Expense increased by 500 | Accrued expenses 500 (current liability) | −500 |
Adjusted profit: 14,000 + 900 − 500 = 14,400.
Balance check: assets rise by 900, liabilities rise by 500, so net assets rise by 400. Profit rises by 400 (14,400 − 14,000). Capital rises by the same amount, so the statement of financial position agrees.
The mistake to watch for
Mistaken working: the student reduces the insurance expense to 300 in the income statement, but leaves the prepayment of 900 off the statement of financial position.
Profit went up by 900, so capital is 900 higher, but no asset shows it. The statement is out by exactly 900. The difference equals the adjustment, which is how you can spot the missing side.
The correction is to add the prepayment under current assets. A quick check: if profit changes by an amount, some asset or liability must change by that amount too.
Check yourself
1. Rent of 2,400 was paid for the year, but 600 of it covers the next year. State the two effects.
Show answer
Income statement: rent expense is 1,800 (2,400 − 600). Statement of financial position: prepaid rent 600 as a current asset. Profit effect: +600.
2. An electricity bill of 350 for the last month has not been paid. State the two effects.
Show answer
Income statement: electricity expense increases by 350. Statement of financial position: accrued expenses 350 as a current liability. Profit effect: −350.
3. Profit before adjustments is 9,000. Apply a prepayment of 400 and an accrual of 250. What is the adjusted profit?
Show answer
9,000 + 400 − 250 = 9,150.
Where this leads next
Practise in adjusting a statement after an accrual and separating cash paid from expense recognised. The percentage-base explorer is useful when an adjustment is given as a percentage.
If tracing slows you down in timed questions, online one-to-one Accounting tuition lets a teacher watch your table take shape and show where a side goes missing.