When recording transactions throughout the year, we often record cash payments or receipts. However, some expenses and incomes relate to more than one accounting period. Adjustments ensure we match revenues with the period in which they were earned and expenses with the period in which they were incurred.

1. Accrued Expenses (Outstanding Expenses)

These are expenses that have been incurred during the period but have not yet been paid by year-end. They must be added to the expenses in the income statement.

Example: Rent of TZS 600,000 per year is payable quarterly. By 31 December, one quarter (TZS 150,000) is outstanding but not yet paid.

2. Prepaid Expenses (Prepayments)

These are expenses that have been paid in advance but relate to future periods. Only the portion used during the current period should be charged as an expense.

Example: Insurance of TZS 240,000 was paid for the whole year. If TZS 60,000 relates to next year, only TZS 180,000 should appear as an expense.

3. Accrued Income (Income Receivable)

This is income earned during the period but not yet received by year-end. It must be added to the income statement.

Example: Rental income of TZS 1,200,000 per year is receivable quarterly. By 31 December, one quarter (TZS 300,000) is outstanding.

4. Bad Debts

These are amounts owed by customers that are unlikely to be collected. They must be recorded as an expense.

1. Start with the trial balance – List all revenue and expense accounts with their unadjusted balances.
2. Identify adjustments needed – Review accounts for accrued expenses, prepaid expenses, accrued income, and bad debts.
3. Prepare adjustment entries – Record the adjustments in the worksheet or general journal.
4. Calculate adjusted figures – Add or subtract adjustments to get the correct amounts for each revenue and expense account.
5. Prepare the income statement – List all revenue accounts, calculate gross profit, then list all expenses, and calculate net profit or loss.

The following trial balance was extracted from the books of Juma Traders on 31 December 2023:

Additional information on 31 December 2023:

• Inventory on 31 December 2023 was TZS 35,000,000.
• Rent of TZS 3,000,000 is outstanding.
• Insurance paid in advance amounts to TZS 2,400,000.
• Bad debts to be written off: TZS 1,500,000.

Solution

Step 1: Calculate Cost of Goods Sold

Beginning inventory: TZS 25,000,000 Add purchases: TZS 165,000,000 Less ending inventory: TZS 35,000,000 Cost of Goods Sold = TZS 155,000,000

Step 2: Calculate Gross Profit

Sales: TZS 280,000,000 Less Cost of Goods Sold: TZS 155,000,000 Gross Profit = TZS 125,000,000

Step 3: Prepare Adjusted Income Statement

Key Adjustments Explained:

• Rent adjustment: Added TZS 3,000,000 outstanding rent to the expense.
• Insurance adjustment: Subtracted TZS 2,400,000 prepaid (not yet used) from the expense.
• Bad debts: Added TZS 1,500,000 as an expense.

In Tanzania, small shop owners like those at Kariakoo Market in Dar es Salaam often buy goods on credit from suppliers and sell to customers on credit too. At the end of the month, they need to prepare an income statement with adjustments to know if they actually made a profit. For example, if they sold goods worth TZS 500,000 to a customer who has not yet paid by month-end, they must adjust the income statement to show this as accrued income—otherwise, they will think they earned less than they actually did. Similarly, if they have unpaid rent or utility bills, these must be included as expenses to get a true picture of profit.