Trial Balance and Period-End Adjustments

What you'll learn

This revision guide covers the preparation of trial balances and the essential period-end adjustments required before final accounts can be produced. You will learn how to extract balances from the ledger, identify and correct errors, and make adjustments for accruals, prepayments, depreciation, and bad debts—all core requirements for the Pearson Edexcel International IGCSE Accounting specification.

Key terms and definitions

Trial balance — A list of all ledger account balances at a specific date, arranged in debit and credit columns, used to check the arithmetical accuracy of double-entry bookkeeping.

Accrual — An expense incurred during an accounting period but not yet paid, creating a liability recorded as a current liability in the statement of financial position.

Prepayment — A payment made in advance for goods or services to be received in a future accounting period, recorded as a current asset.

Depreciation — The systematic allocation of the cost of a non-current asset over its useful life, reflecting wear and tear, obsolescence, or the passage of time.

Bad debt — An amount owed by a trade receivable that is considered irrecoverable and must be written off as an expense.

Provision for doubtful debts — An estimate of the amount of trade receivables that may not be collected, created to apply the prudence concept.

Suspense account — A temporary account used when a trial balance does not balance or when the correct ledger account for a transaction is unknown.

Closing inventory — Goods held for resale at the end of an accounting period, valued at the lower of cost and net realisable value.

Core concepts

Purpose and preparation of a trial balance

The trial balance serves three main purposes:

• Checks the arithmetical accuracy of double-entry bookkeeping
• Provides a summary of all ledger balances in one document
• Forms the basis for preparing financial statements

How to extract a trial balance:

1. Balance off all ledger accounts
2. List all accounts with debit balances in the debit column
3. List all accounts with credit balances in the credit column
4. Total both columns—they should equal

Typical debit balances include:

• Non-current assets (buildings, equipment, vehicles)
• Purchases
• Expenses (rent, wages, insurance)
• Trade receivables
• Drawings
• Bank (if in debit/overdrawn shown as asset)

Typical credit balances include:

• Capital
• Sales
• Revenue/income accounts
• Trade payables
• Accumulated depreciation
• Bank overdraft (shown as liability)

A balanced trial balance does not guarantee complete accuracy—it only confirms that debits equal credits. Errors of omission, commission, principle, original entry, reversal of entries, and compensating errors will not prevent a trial balance from balancing.

Period-end adjustments for accruals and prepayments

Businesses must apply the accruals (matching) concept, ensuring that income and expenses are recorded in the period to which they relate, not necessarily when cash is paid or received.

Accrued expenses (accruals):

When an expense relates to the current period but has not been paid:

1. Add the accrued amount to the expense in the income statement
2. Show the accrual as a current liability in the statement of financial position
3. Journal entry: Dr Expense account / Cr Accruals account

Example: Annual insurance is £1,200. By year-end, only £1,000 has been paid. The £200 owing must be accrued.

Prepaid expenses (prepayments):

When payment has been made for expenses relating to the next accounting period:

1. Deduct the prepaid amount from the expense in the income statement
2. Show the prepayment as a current asset in the statement of financial position
3. Journal entry: Dr Prepayments account / Cr Expense account

Example: Rent of £600 per month is paid. In March, rent for April is also paid. The £600 April payment is a prepayment at 31 March year-end.

Accrued income:

Revenue earned but not yet received is added to income and shown as a current asset (similar treatment to prepaid expenses but for income).

Prepaid income (income received in advance):

Revenue received but not yet earned is deducted from income and shown as a current liability (similar treatment to accruals but for income).

Depreciation adjustments

Depreciation recognises that non-current assets lose value over time. Two methods are commonly tested:

Straight-line method:

Depreciation per year = (Cost - Residual value) ÷ Estimated useful life

• Charges the same amount each year
• Simple to calculate
• Suitable for assets that depreciate evenly (buildings, fixtures)

Reducing balance method:

Depreciation = Net book value at start of year × Depreciation rate %

• Charges more depreciation in early years
• Reflects higher maintenance costs for older assets
• Suitable for assets that lose value quickly (vehicles, computers)

Recording depreciation:

1. Dr Depreciation expense / Cr Provision for depreciation (accumulated depreciation)
2. Show depreciation expense in the income statement
3. Show accumulated depreciation as a deduction from the asset cost in the statement of financial position
4. Net book value (carrying amount) = Cost - Accumulated depreciation

Bad debts and provision for doubtful debts

Bad debts written off:

When a debt becomes irrecoverable:

1. Dr Bad debts expense / Cr Trade receivables
2. Charge the bad debt as an expense in the income statement
3. Reduce trade receivables in the statement of financial position

Provision for doubtful debts:

An estimate of receivables that may become uncollectable:

• Usually calculated as a percentage of remaining trade receivables (after bad debts written off)
• Applies the prudence concept
• Shown as a deduction from trade receivables in the statement of financial position

Creating or increasing the provision:

Dr Income statement (as an expense) / Cr Provision for doubtful debts

Decreasing the provision:

Dr Provision for doubtful debts / Cr Income statement (as income or reduced expense)

The adjustment to income statement is only the increase or decrease in the provision, not the total provision amount.

Closing inventory adjustments

Closing inventory must be valued and recorded at the end of the accounting period to calculate cost of sales correctly.

Recording closing inventory:

1. Dr Inventory account / Cr Income statement (closing inventory line)
2. Show inventory as a current asset in the statement of financial position
3. Include in the trading account calculation:

Cost of sales = Opening inventory + Purchases - Closing inventory

Closing inventory is not included in the trial balance before adjustments because it has not yet been recorded in the ledger accounts. It appears only after the physical stocktake at period-end.

Valuation rule: Lower of cost and net realisable value (prudence concept).

Errors and the suspense account

When a trial balance does not balance, the difference is temporarily placed in a suspense account until the error is found and corrected.

Errors that affect the trial balance (create a difference):

• One-sided entry (only debit or credit recorded)
• Casting errors in ledger accounts
• Incorrect balancing of accounts
• Errors in transferring balances to trial balance
• Recording different amounts for debit and credit entries

Errors that do not affect the trial balance:

• Error of omission — transaction completely omitted
• Error of commission — entry in wrong account of same type (e.g., wrong receivable)
• Error of principle — entry in wrong type of account (e.g., revenue treated as capital)
• Error of original entry — wrong amount used for both debit and credit
• Reversal of entries — debit and credit reversed
• Compensating errors — two or more errors cancel each other out

Correcting errors through the suspense account:

Use journal entries to correct errors, with the suspense account absorbing the difference until balanced.

Worked examples

Example 1: Accruals and prepayments

The trial balance at 31 December 2023 shows:

• Rent expense £4,800
• Insurance £960

Additional information:

• Rent for January 2024 (£400) was paid in December 2023
• Insurance includes a prepayment of £80
• Electricity bill for December 2023 of £150 has not been paid

Required: Calculate the adjusted expense figures for the income statement.

Solution:

Rent expense:

• Trial balance figure: £4,800
• Less: Prepayment for January 2024: (£400)
• Rent expense for income statement: £4,400

Insurance expense:

• Trial balance figure: £960
• Less: Prepayment: (£80)
• Insurance expense for income statement: £880

Electricity expense:

• Trial balance figure: £0 (not shown)
• Add: Accrual for December: £150
• Electricity expense for income statement: £150

Statement of financial position extract:

• Current assets: Prepayments (£400 + £80) = £480
• Current liabilities: Accruals = £150

Example 2: Depreciation calculation

A business purchased machinery on 1 January 2021 for £20,000. The estimated residual value is £2,000 and useful life is 6 years. Calculate depreciation for the year ended 31 December 2023 using the straight-line method, and show the statement of financial position extract.

Solution:

Annual depreciation = (£20,000 - £2,000) ÷ 6 = £3,000 per year

By 31 December 2023 (3 years of ownership):

• Total accumulated depreciation = £3,000 × 3 = £9,000
• Net book value = £20,000 - £9,000 = £11,000

Income statement extract for year ended 31 December 2023:

• Depreciation expense: £3,000

Statement of financial position extract at 31 December 2023:

Non-current assets	Cost	Accumulated depreciation	Net book value
Machinery	£20,000	£9,000	£11,000

Example 3: Bad debts and provision for doubtful debts

Trade receivables at 31 March 2024 total £18,500. A debt of £500 is to be written off as bad. The provision for doubtful debts is to be maintained at 4% of remaining receivables. The existing provision is £640.

Required: Calculate the adjustment to the provision and show ledger entries.

Solution:

Step 1: Write off bad debt

• Trade receivables after write-off: £18,500 - £500 = £18,000

Step 2: Calculate required provision

• Required provision = 4% × £18,000 = £720

Step 3: Calculate adjustment

• Existing provision: £640
• Required provision: £720
• Increase needed: £80

Journal entries:

Bad debt write-off:

• Dr Bad debts expense £500
• Cr Trade receivables £500

Increase provision:

• Dr Provision for doubtful debts (expense) £80
• Cr Provision for doubtful debts £80

Income statement charges:

• Bad debts: £500
• Increase in provision: £80
• Total charge: £580

Statement of financial position extract:

• Trade receivables: £18,000
• Less: Provision for doubtful debts: (£720)
• Net receivables: £17,280

Common mistakes and how to avoid them

• Confusing accruals with prepayments — Remember: accruals are amounts owed (liability); prepayments are amounts paid in advance (asset). Accruals add to expenses; prepayments reduce them.

• Including closing inventory in the trial balance — Closing inventory is determined after the trial balance is extracted through a physical count, so it never appears in the initial trial balance.

• Charging total provision for doubtful debts to income statement — Only the increase or decrease in the provision affects profit, not the entire provision amount.

• Calculating depreciation on reduced balance using the original cost — Reducing balance depreciation is always calculated on the net book value at the start of the year, not the original cost.

• Forgetting to balance off expense accounts after adjustments — When making accrual or prepayment adjustments, remember to show both the income statement transfer and the statement of financial position balance.

• Treating capital expenditure as revenue expenditure — This is an error of principle. Capital expenditure (buying assets) goes to the statement of financial position; revenue expenditure (running costs) goes to the income statement.

Exam technique for "Trial Balance and Period-End Adjustments"

• Command word recognition — "Prepare" a trial balance means set out in proper format with debit and credit columns totalled. "Calculate" adjusted figures requires showing workings. "Explain" needs a written reason, not just figures.

• Show all workings clearly — For adjustments, examiners award marks for method even if the final answer is incorrect. Always show calculations separately: "£4,800 - £400 prepayment = £4,400".

• Use proper account formats — When asked to prepare ledger accounts, use T-account format with dates, details, and correct balancing. Journal entries require Dr/Cr notation and brief narratives.

• Read additional information carefully — Adjustment details appear after the trial balance. Highlight or underline each adjustment requirement and tick them off as you complete them to avoid omissions.

Quick revision summary

The trial balance lists all ledger balances to check arithmetical accuracy and provide data for final accounts. Period-end adjustments ensure compliance with the accruals concept: accruals are added to expenses (creating liabilities); prepayments are deducted (creating assets). Depreciation spreads asset costs over useful life using straight-line or reducing balance methods. Bad debts are written off completely; provisions estimate future losses. Closing inventory appears only after adjustments, valued at lower of cost and net realisable value. Suspense accounts temporarily hold unexplained differences pending error correction.