amendment of a statement of profit or loss

10.1 Financial Statements – Statement of Profit or Loss (Amendment)

Scope of these notes

• These notes cover sub‑topic 10.1.1 – Amend a statement of profit or loss of the Cambridge IGCSE/A‑Level Business (9609) syllabus.
• They are a stand‑alone resource, but a quick‑reference checklist at the end shows where this sub‑topic fits within the wider syllabus (Units 1‑10).
• For full coverage of the syllabus, see the companion note‑packages on:
  • Business finance, working capital and sources of finance (Units 1‑5)
  • Costing, budgeting, break‑even and ratio analysis (Units 5‑6)
  • Investment appraisal, strategy, HRM, marketing, operations and the external environment (Units 7‑10)

Learning objectives

By the end of this lesson you should be able to:

1. Identify errors, omissions or re‑classifications that require amendment of a profit‑or‑loss statement.
2. Prepare the correct journal entry(s) and post them to the trial balance.
3. Adjust the relevant line items, recalculate all subtotals and totals, and present the amended statement clearly.
4. Explain the impact of the amendment on related financial statements (statement of financial position) and on tax expense.

Why the statement of profit or loss matters

• Shows the profitability of a business over a defined period.
• Supplies essential information for internal decision‑making (pricing, cost control) and external users (investors, creditors, tax authorities).
• Forms part of the annual accounts together with the statement of financial position and cash‑flow statement.

Key concepts & formulae

Combined expression:

$$\text{Net Profit}= \bigl(\text{Revenue}-\text{Cost of Sales}-\text{Operating Expenses}+\text{Other Income}-\text{Other Expenses}\bigr)-\text{Tax Expense}$$

When amendments are required

• Errors discovered after the accounts have been prepared – e.g., a cost recorded in the wrong expense category.
• Re‑classification of items – moving an amount between Cost of Sales, Operating Expenses, or Other Income/Expenses.
• Omitted transactions – forgotten sales, purchases, or interest entries.
• Changes in accounting policy or new standards – e.g., a shift from FIFO to weighted‑average inventory costing.

Error‑identification checklist (exam‑ready)

Before you start any amendment, tick the relevant box(s):

• ☐ Wrong account used (e.g., rent recorded as utilities)
• ☐ Wrong amount entered (transposition, rounding error)
• ☐ Transaction omitted entirely
• ☐ Transaction duplicated
• ☐ Accounting policy changed (requires re‑classification)

Step‑by‑step procedure to amend a statement of profit or loss

1. Identify the error or omission. Pinpoint the account(s) affected and the monetary amount.
2. Determine the impact. Decide which line(s) of the profit‑or‑loss statement will change (Revenue, Cost of Sales, Operating Expenses, Other Income/Expenses, Tax).
3. Prepare the correcting journal entry. Use the double‑entry rule (see box below).
4. Post the entry to the trial balance. Update the balances of the affected ledger accounts.
5. Adjust the profit‑or‑loss statement. Replace the original figures with the corrected ones.
6. Re‑calculate all subtotals and totals. Gross profit, operating profit, profit before tax and net profit must all be recomputed.
7. Re‑compute tax expense. Apply the appropriate tax rate or tax‑impact scenario to the new profit‑before‑tax figure.
8. Document the amendment. Include a brief note on the working paper and, if required, an explanatory note in the published accounts.

Worked example 1 – Re‑classifying an expense (no change to profit)

Original statement (year ended 31 December 2025)

Issue identified: £2,500 of electricity expense was recorded under “Rent”.

Correcting journal entry:

Debit Utilities £2,500 | Credit Rent £2,500

Amended statement

Because the total of operating expenses remains £34,500, the profit figures are unchanged; the amendment only re‑allocates £2,500 from Rent to Utilities.

Worked example 2 – Omitted sales (profit changes)

Original statement (year ended 31 December 2025)

Issue identified: £7,200 of sales were omitted from the Revenue column.

Correcting journal entry:

Debit Trade Receivables £7,200 | Credit Revenue £7,200

Amended statement

All profit figures increase because the omitted revenue directly raises Gross Profit, Operating Profit, PBT and Net Profit. Tax is recomputed at 30 % of the new PBT (£45,200 × 30 % = £13,560).

Tax‑impact scenarios

When the profit figure changes, the tax expense may need to be adjusted in different ways depending on the tax regime.

What‑if extensions (linking to other syllabus areas)

• Effect on the statement of financial position – A change to Cost of Sales may alter closing inventory, which in turn affects current assets and equity (retained earnings).
• Depreciation methods – Switching from straight‑line to reducing‑balance changes the depreciation expense line, profit before tax and tax expense.
• Materiality & audit implications – Only material errors (those that could influence decisions of users) need to be restated in published accounts; immaterial adjustments can be disclosed in the notes.

Key points to remember

• Trace the error to its source before making any amendment.
• Always update the trial balance first; the profit‑or‑loss statement is a summary of those balances.
• Re‑calculate every subtotal that the corrected line item influences.
• Re‑compute tax expense using the appropriate scenario.
• Provide a concise explanatory note – examiners award marks for clear justification.
• Keep original figures in your working notes; only the final presented statement should show the amended totals.

Further reading (link to other note‑packages)

• Costs & Break‑Even Analysis – impact of Cost of Sales changes on contribution margin (Unit 5, sub‑topic 5.4.2).
• Depreciation Methods – how different methods affect operating profit (Unit 5, sub‑topic 5.5.1).
• Taxation – calculation of corporation tax, loss carry‑forward and capital allowances (Unit 6, sub‑topic 6.3.1).
• Statement of Financial Position – relationship between profit, retained earnings and equity (Unit 2, sub‑topic 2.2.3).
• Materiality & Auditing – when an amendment must be restated in published accounts (Unit 10, sub‑topic 10.4.2).

Quick‑reference checklist – where this sub‑topic sits in the syllabus

Practice question

XYZ Co. reported a net profit of £12,800 for the year ended 31 December 2025. It later emerged that a £1,200 purchase of raw material was omitted from Cost of Sales. Show how the statement of profit or loss should be amended and calculate the corrected net profit (assume a corporate tax rate of 30 %).

Suggested approach (for students)

1. Identify the omitted amount (£1,200) and the account affected (Cost of Sales).
2. Journal entry: Debit Cost of Sales £1,200 | Credit Purchases/Inventory £1,200.
3. Increase Cost of Sales by £1,200 → Gross Profit falls by £1,200.
4. Operating Profit, PBT and Net Profit each fall by £1,200 (tax to be recomputed).
5. Re‑calculate tax: New PBT = (£12,800 + tax original) − £1,200. Original tax = 30 % × (£12,800 + £3,840) = £3,840. New PBT = (£12,800 + £3,840) − £1,200 = £15,440 − £1,200 = £14,240. New tax = 30 % × £14,240 = £4,272.
6. Corrected Net Profit = New PBT − New tax = £14,240 − £4,272 = £9,968.

Answer: Corrected Net Profit = £9,968.