Learn year-end adjustments by doing them

During the year the books record what was invoiced, paid and received. At the year end that is not quite the same as what was earned and what was used. The adjustments close the gap.

The accruals idea is behind accruals, prepayments and depreciation alike: income and costs go into the year they are earned or used. The date the money moves does not decide it.

Accrued expense

a cost used this year that has not been paid or billed by the year end. It is a liability

Prepaid expense

a cost paid this year that will be used next year. It is an asset

Depreciation

the share of an asset's cost that is charged as an expense of the year

Irrecoverable debt

money a customer owes that the business no longer expects to receive

Closing inventory

goods bought to sell that are still unsold at the year end

Yarrow Kitchens has a year end of 31 December. Its draft profit is £24,650.00, before four adjustments.

• An electricity bill of £885.00 arrives in February. It covers November, December and January, so two of its three months belong to this year: £590.00.
• Insurance of £1,440.00 was paid on 1 October for twelve months. Nine of those months fall after the year end: £1,080.00.
• A van cost £22,200.00. It will be used for 4 years and then sold for an expected £2,600.00. Straight line depreciation is £19,600.00 divided by 4: £4,900.00 a year.
• A customer who owes £365.00 has gone out of business, so the debt is written off.

Three of the journals add to the costs of the year, and the prepayment takes a cost out. The profit becomes £24,650.00, less £590.00, plus £1,080.00, less £4,900.00, less £365.00: £19,875.00.

• Split a payment between two years by counting the months that fall in each.
• Work out an accrual or a prepayment, for an expense or for income, and write its journal.
• Work out a year's expense from an opening adjustment, the payments and a closing adjustment.
• Work out depreciation by the straight line method and by the reducing balance method, for a full year and for part of one.
• Tell capital expenditure from revenue expenditure, and record the disposal of an asset.
• Write off an irrecoverable debt, and set up or change an allowance for doubtful debts.
• Value closing inventory at the lower of cost and net realisable value, and put it into the books.
• Take a trial balance through the adjustments on an extended trial balance, to the profit for the year.

Every adjustment is a journal, so debit and credit and the trial balance come before any of this. Then take the modules in this order.

1. Accruals and prepayments. The accruals idea, accrued and prepaid expenses, accrued and deferred income, and reversing last year's adjustments.
2. Depreciation. Why assets are depreciated, the straight line and reducing balance methods, part of a year, and the year-end journal.
3. Non-current assets. Capital or revenue expenditure, the asset register, disposals, part exchange, and how a new asset is approved and paid for.
4. Irrecoverable debts. Writing off a debt, the allowance for doubtful debts and how it changes, a written-off debt that is paid after all, and receivables in the year-end accounts.
5. Inventory at the year end. Counting inventory, cost or net realisable value, the closing inventory journal and the cost of goods sold.
6. The extended trial balance. The worksheet that takes the trial balance through every adjustment to the profit for the year: each pair of columns, then a whole one.

Each adjustment has two sides. One changes the profit for the year. The other changes an asset or a liability in the statement of financial position.

Costs that are too high make profit too low. Costs that are too low make profit too high.

• Going by the date the money moved. A cost belongs to the year it is used, paid or not.
• Getting an accrual and a prepayment the wrong way round. An accrual adds to the expense and is owed. A prepayment comes out of the expense and is carried forward as an asset.
• Thinking depreciation is cash put aside. It is a share of a cost that has already been paid. No money leaves the bank when it is charged.
• Reading the carrying amount as what the asset would sell for. It is the part of the cost not yet charged as an expense.
• Taking the residual value off before a reducing balance charge. The percentage is worked on the carrying amount at the start of the year.
• Crediting the asset's own account with depreciation. That account stays at cost. The credit goes to Accumulated depreciation.
• Writing off a debt that is only doubtful. A doubtful debt stays in trade receivables and an allowance is made for it. Each year only the change in the allowance is posted.
• Valuing inventory in total. The lower of cost and net realisable value is taken for each line on its own.

Ledger Drill teaches the adjustments through questions, with no videos. A task gives the dates and the figures of one invented business, then asks for the working and the entry.

• Type an accrual or a prepayment from a bill and its dates.
• Type a year's depreciation, then the carrying amount.
• Build the journal for an adjustment, line by line.
• Put the steps of a disposal or of the year-end work on receivables in order.
• Find the one wrong row in an asset register or an extended trial balance.
• Sort rows into the statement of profit or loss columns and the statement of financial position columns.

Every answer is marked at once, with the working behind it.

The modules and rooms are listed below, in order. A room that costs nothing carries a Free tag.