Study tips: Accounting adjustments in an ETB or journals – Part 1

aat comment

The first article in our series on Accounting adjustments in an ETB or journals.

Study Tips: Accounting adjustments in an ETB or journals

Just before settling down to write this article I sent a text to Freya, a student who is sitting a Level 3 exam this afternoon, to try and calm her nerves by reminding her of the knowledge and understanding she has been working so hard to successfully achieve. 

She replied, ‘fingers crossed’, to which my immediate thought was, there isn’t really much luck involved as she is so well prepared.

I’m sure you’ve heard the adage ‘success is 90% preparation and only 10% perspiration’.

Or how about ‘chance favours the prepared mind’, which was coined by the scientist Louis Pasteur?

Both a bit cheesy to text her back, but make the point well.

This three-part series of articles is going to look at one of the most difficult areas of accounts preparation, making corrections and adjustments, so that when you’re in her position you can be confident 90% of the work has already been done.

The foundations of this area lie back at Level 2, and our fundamental understanding of how accounting systems work, using day-books and categorising accounts into six basic types that are then organised into the general, sales and purchase ledgers.

If your working knowledge of debits and credits is a little rocky then it might be worth having a read of Balancing a trial balance and correcting errors with journals – part 1 in preparation, as we’re using the same understanding and techniques here just with more complex examples.

Accounting adjustments

Let’s start with adjustments as they’re more predictable than correcting errors.

Year-end entails a wide variety of adjustments and this range requires us to have a substantial depth of theoretical knowledge as well as the practical expertise to correctly write journals or make entries in the adjustment columns of an extended trial balance (ETB).

So, we need to prepare ourselves by understanding the key elements to each of these adjustments but we can also simplify the job by using a set of steps that apply in general. These are:

Step 1Calculate the adjustment
Step 2Post the Double Entry
 1 or 2 x Statement of Profit or Loss Account(s) (SPL)
 1 x Statement of Financial Position Account (SFP)

Fundamentally overall total debits must equal total credits

Step 3Close off the SPL Account
Step 4Balance the SFP Account

Note: You may have make adjustments in a variety of ways at work or for an exam. The overall theory is the same even if you don’t always use all the steps.

We’re going to start by concentrating on the key elements of valuing the stock left unsold in a business at the end of the financial year.

Closing inventory

  • IAS2: value at the lowest of either cost or net realisable value (NRV)
  • Cost: The purchase price plus the cost of getting the inventory into its current position eg. delivery charges
  • NRV: The expected selling price of the inventory, less any further costs to be incurred such as selling or distribution costs or repairs

So in practice we may have to calculate the cost and NRV. Then compare them, select the lower of the two calculations and finally, include it in a TB.

If our selling price is 35% higher than cost, then straight away we know we must value the closing inventory at cost as it will be the lower of cost and NRV.

If the sales value of the closing inventory is £146,987 then to calculate the cost we can apply our understanding of percentages:

 £21,195 / 135 = £157 (i.e. 1%)

£157 x 100 = £15,700 (i.e. 1% x 100% = cost)


That was step 1, calculating the adjustment.

Step 2 is now to post it using double entry bookkeeping. As a journal that would be:

flaka 1

If the double entry is required in an ETB it will be exactly the same, just presented in a different format:


In summary

This is just an extract from an ETB so it won’t balance overall. However, each individual adjustment should balance with the total debits equalling the total credits within the transaction. This is the same for both journals and the ETB’s so a quick calculation to check is always worthwhile.

Read part two now, where we’ll look at the key elements of irrecoverable debts and the associated calculations required, as well as contrasting them to the process of adjusting an allowance for doubtful debts. 

We also need to consider prepayments and accruals.

Finally, in part three we’ll look at how to correct common errors in our quest to ensure we’re as prepared as Freya was today and that we too can tackle this challenging area with confidence.

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

Related articles