Financial Accounting · Lesson 6

Final accounts with adjustments and inventory valuation

JAMBWAECNECO

What the syllabus asks

JAMB: Topic 6 Final accounts of a sole trader (trading, profit and loss account, balance sheet, adjustments: accruals, prepayments, bad and doubtful debts, discounts); Topic 7 Stock valuation (FIFO, LIFO, simple average)

WAEC: Final accounts of a sole trader; adjustments; provision (allowance) for doubtful debts; stock valuation incl. weighted average

NECO: Final accounts of a sole trader; adjustments; provision (allowance) for doubtful debts; stock valuation incl. weighted average

What you will learn

Prepare an income statement and statement of financial position for a sole trader.
Calculate cost of sales, gross profit and net profit.
Make adjustments for accruals, prepayments, bad debts, allowance for doubtful debts and depreciation.
Distinguish capital from revenue items in final accounts.
Value inventory by FIFO, LIFO, simple average and weighted average.
Explain the effect of the inventory method on profit.

Key points

Income statement covers a period; statement of financial position is at a date.
Cost of sales = opening inventory + net purchases + carriage inwards − closing inventory.
Gross profit − expenses + other income = net profit.
Trial balance items are used once; adjustments twice.
Accrued expense: add, current liability. Prepayment: subtract, current asset.
Only the change in the allowance for doubtful debts hits profit; deduct the full allowance from receivables.
Depreciation: expense plus accumulated depreciation deducted from cost.
Closing capital = opening capital + net profit − drawings.
Inventory: lower of cost and NRV; FIFO, LIFO, simple and weighted average.
Rising prices: FIFO gives higher closing inventory and profit than LIFO; LIFO not allowed by IAS 2.

Start here: Purpose of final accounts

A sole trader such as a building-materials dealer in Owerri wants two answers at the end of each year: “Did I make a profit?” and “What is the business worth?” The final accounts give these answers.

The income statement (traditional name: trading, profit and loss account) covers a period, for example “for the year ended 31 December 2026”. It has two parts: the trading section, which finds gross profit, and the profit and loss section, which finds net profit.
The statement of financial position (traditional name: balance sheet) is a snapshot at a date, “as at 31 December 2026”. It lists assets, liabilities and capital.

WAEC uses both sets of names; JAMB mostly uses the traditional ones. In your answer you can use either, but be consistent. The modern (IFRS) words you will meet: revenue (sales), inventory (stock), trade receivables (debtors), trade payables (creditors), non-current assets (fixed assets).

Users of final accounts

The owner (profit, drawings), banks (before granting loans), the tax authority (now the Nigeria Revenue Service, which replaced FIRS under the 2025 tax reforms), suppliers (creditworthiness), and prospective buyers of the business.

From trial balance to final accounts

Each item in the trial balance is used once: income and expense items (sales, purchases, returns, carriage, wages, rent, discounts) go to the income statement; asset, liability and capital items (premises, receivables, bank, loans, capital, drawings) go to the statement of financial position. Adjustments given below the trial balance are used twice: once in each statement. This “once / twice” rule is the key to every WAEC final-accounts question.

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Practice questions

1. Sales ₦2 400 000; returns inwards ₦60 000; opening inventory ₦180 000; purchases ₦1 500 000; carriage inwards ₦40 000; closing inventory ₦210 000. Gross profit:

₦830 000
₦890 000
₦790 000
₦840 000

Show answer

A: ₦830 000
Cost of sales = ₦180 000 + ₦1 500 000 + ₦40 000 − ₦210 000 = ₦1 510 000; GP = ₦2 400 000 − ₦60 000 − ₦1 510 000 = ₦830 000.

2. Carriage inwards is treated as

a selling expense
a deduction from sales
an asset
part of the cost of purchases in the trading account

Show answer

D: part of the cost of purchases in the trading account
It is the cost of bringing goods in.

3. Rent paid during the year ₦96 000; rent owing at the year end ₦24 000. Rent charged in the income statement:

₦72 000
₦24 000
₦120 000
₦96 000

Show answer

C: ₦120 000
₦96 000 + ₦24 000 accrued = ₦120 000.

4. Rent received in advance at the year end is shown as

part of capital
a current liability
a current asset
income

Show answer

B: a current liability
The business owes the tenant future use of the property.

5. Receivables ₦400 000; existing allowance for doubtful debts ₦22 000; new allowance required 5%. The income statement shows:

Income (reduction in allowance) ₦2 000
Expense ₦20 000
Expense ₦2 000
Expense ₦22 000

Show answer

A: Income (reduction in allowance) ₦2 000
Required ₦20 000 < existing ₦22 000: the allowance falls by ₦2 000, credited to the income statement.

Key words

Final accounts: Statements prepared at the end of a period: income statement and statement of financial position.
Income statement: Shows revenue, cost of sales, expenses and profit for a period (trading, profit and loss account).
Statement of financial position: Shows assets, liabilities and capital at a date (balance sheet).
Cost of sales: Cost of the goods actually sold in the period.
Gross profit: Net sales minus cost of sales.
Net profit: Gross profit plus other income minus expenses.
Accrued expense: An expense incurred but not yet paid at the year end.
Prepayment: An expense paid in advance for a later period.
Accrued income: Income earned but not yet received.
Income received in advance: Income received for a later period; a liability.
Bad debt: A debt known to be irrecoverable and written off as an expense.
Allowance for doubtful debts: An estimate of receivables that may not be collected; formerly provision for doubtful debts.

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