Accounting Assignment Example: Journal Entries, Trial Balance, Adjusting Entries and Absorption vs Marginal Costing

This accounting assignment example takes a new business through its first month, from journal entries to a balance sheet, and then answers three costing questions on overhead absorption and on absorption versus marginal costing. Our team wrote it to a UK university accounting brief, and we have re-worked every figure for this page so that each table can be checked against the one before it.

The figures come from an invented case set by the brief. If your brief uses a real company instead, our guide on how to read an annual report for a case study shows where the same three statements sit in a published report and how to cite them.

What Did the Assignment Ask?

The brief gave a month of transactions for a business that opened on 1 April 2024, and a separate set of production figures for a manufacturer with three products. It asked for the bookkeeping first, a comparison of business forms second and three costing calculations last. In our words, the parts were:

1. Section A1: record April's transactions as journal entries and post them to the ledger.
2. Prepare the unadjusted trial balance at 30 April.
3. Journalise and post the month-end adjusting entries: depreciation of £1,200, salaries owed of £640, £3,300 of income earned but not yet recorded, and closing inventory of £1,400.
4. Prepare the income statement, the statement of owner's equity and the balance sheet.
5. Section A2: explain the main types of business entity, with the advantages and disadvantages of each.
6. Section B: work out the full production cost per unit of Products B and C, absorbing overhead on machine hours.
7. Say whether overhead was under- or over-absorbed, and by how much.
8. Work out Product D's profit and explain how absorption and marginal costing treat its costs.

Level: an introductory financial and management accounting assignment, answered as a report with the workings in tables. Where a figure in the brief could be read two ways, we state the reading we used in one line next to the table it affects.

How Are April's Transactions Recorded as Journal Entries?

Each transaction becomes one entry with equal debits and credits. Assets, expenses and drawings increase on the debit side; capital, liabilities and income increase on the credit side. April has ten transactions, starting with the owner putting in £40,000 of cash and an £80,000 computer, and the journal totals £154,000 on each side.

The accounting cycle in this example, from transactions to statements

1. 1 Transactions Ten in April, from the owner's £120,000 investment to £3,000 of drawings.
2. 2 Journal Each transaction as equal debits and credits: £154,000 on each side.
3. 3 Ledger Every line posted to its account; cash closes at £37,600.
4. 4 Unadjusted trial balance Debits and credits agree at £135,800.
5. 5 Adjusting entries Depreciation, salaries owed, accrued income and closing inventory: £6,540 each side.
6. 6 Adjusted trial balance £142,340 each side, the source of every line in the statements.
7. 7 Financial statements Profit £3,460, owner's equity £120,460, total assets £121,100.

Assumption: the case calls the business a limited company, but it records the owner's investment as capital and the £3,000 taken out on 30 April as drawings, and asks for a statement of owner's equity. Those are the books of an owner-managed business, so we follow them; the business-forms section shows what changes for a company. The month-end adjustments are kept out of this journal and come after the trial balance.

Assumption: the rent and the insurance cover April only. If either covered a longer period, the unexpired part would be a prepayment, an asset, at the month end.

Posting to the Cash Account

Posting copies each journal line into its ledger account. Cash is the busiest account, so here it is in full; every other account has one or two entries, and their balances go straight into the trial balance below.

Cash in of £55,800 less cash out of £18,200 leaves £37,600, the balance the trial balance carries.

What Does the Unadjusted Trial Balance Show?

It lists every ledger balance before the month-end adjustments and proves that total debits equal total credits. For April both columns total £135,800. A slip to check for is carrying the computer at its £1,200 depreciation charge instead of its £80,000 cost, which leaves the debit column £78,800 short at £57,000.

Agreement is a check on the arithmetic, not proof that the books are right: a transaction left out altogether, or posted to the wrong account on the correct side, still balances. That is why a marker reads the account names as closely as the totals.

Which Adjusting Entries Are Needed at Month End?

The brief gives four month-end items, and each needs an entry so that April carries only April's income and costs: a month's depreciation on the computer, salaries earned by staff but not yet paid, income earned but not yet recorded, and goods still unsold at 30 April. Together they add £6,540 to each side of the trial balance.

Depreciation is credited to accumulated depreciation, not to the computer account, so the balance sheet shows the £80,000 cost beside the depreciation to date; the carrying amount is £78,800 either way. A new business has no opening inventory, and the £1,400 of closing inventory is given in the brief.

Is the £3,300 Accrued Income or Unearned Income?

The timing of the cash decides it. Accrued income is revenue earned but not yet billed or paid for: an asset, because a customer owes the business money. Unearned income, also called deferred income, is cash received before the work is done: a liability, because the business owes the customer the work. Revenue follows the work, not the cash; under IFRS 15 it is recognised when the customer obtains control of the promised goods or services.

Nothing in April's transactions shows a customer paying in advance, so there is no unearned income to release. We read the £3,300 as accrued income: Dr Accrued income, Cr Sales revenue, and it sits under current assets. If your brief says a customer paid in advance, the receipt goes first to Unearned income (Dr Cash, Cr Unearned income) and sits under current liabilities; the month-end entry then moves only the earned part to revenue (Dr Unearned income, Cr Sales revenue).

Posting the Adjustments: The Salaries Account

Each adjusting entry is posted like any other journal line. The salaries account shows the effect: two payments from cash, then the £640 accrual, giving the £7,840 that April's income statement must carry.

The other side of the £640 is a credit to Salaries payable, which carries it into May as a liability; sales revenue rises the same way, to £19,100.

The Adjusted Trial Balance

After posting, the trial balance is drawn up again. Both sides now total £142,340: the £135,800 from before plus the £6,540 of adjustments. Every line of the three statements below comes from this table.

How Do the Entries Become the Income Statement and Balance Sheet?

Income and expenses from the adjusted trial balance make the income statement, which shows a net profit of £3,460 for April. That profit, less the owner's £3,000 of drawings, takes capital from £120,000 to £120,460 in the statement of owner's equity, and £120,460 must equal net assets on the balance sheet. Here it does.

Income Statement for the Month Ended 30 April 2024

Drawings are not an expense. They are the owner taking money out, so they belong in the statement of owner's equity, not here.

Statement of Owner's Equity for the Month Ended 30 April 2024

A company shows the same movement in a statement of changes in equity.

Balance Sheet at 30 April 2024

The statements tie at two points: the £3,460 profit carries from the income statement into owner's equity, and £120,460 of equity equals £121,100 of assets less £640 of liabilities. Once statements like these exist, most finance modules ask you to analyse them with ratios, as our financial analysis sample on Godrej Properties does with a real annual report.

Sole Trader, Partnership or Limited Company: Which Fits a New Business?

In the UK the choice is between a sole trader, a partnership or limited liability partnership (LLP), and a private or public limited company. The deciding difference is usually liability: sole traders and partners are personally responsible for the business's debts, while company shareholders and LLP members risk only what they put in.

On the brief's accounts the business runs as a sole trader would: one owner's capital in, drawings out, and the owner carrying the risk, which suits a first month. Run as the limited company the case names, the owner's capital would be replaced by share capital, and often a loan to the company, with a salary or dividends instead of drawings and liability capped at the investment. That earns its extra paperwork once the owner takes on debts larger than they could repay personally, or wants an investor.

The directors' duties in the table are from GOV.UK's guide to running a limited company, and the plc rules from Companies House's Life of a company guidance.

What Is the Full Cost per Unit of Products B and C?

Product B costs £240 a unit and Product C £340. Each figure is direct materials plus direct labour plus overhead absorbed at a predetermined rate of £5 per machine hour, which is the budgeted overhead of £310,000 divided by the 62,000 machine hours budgeted for the two products together.

Where Product C's extra £100 a unit comes from

Chart data

Item	Value (GBP)
Direct materials (C £160, B £120)	40 GBP
Direct labour (C £110, B £70)	40 GBP
Overhead at £5 an hour (C £70, B £50)	20 GBP

Overhead absorption rate = budgeted overhead ÷ budgeted machine hours = £310,000 ÷ (20,000 + 42,000) = £5.00 per machine hour.

Assumption: the machine hours given, 20,000 for B and 42,000 for C, are both the budget and the hours worked, and the brief's "20,000 budgeted hours" is Product B's share. Dividing £310,000 by 20,000 hours would absorb £961,000, more than three times the budget.

Product C uses 14 machine hours a unit against B's 10, so £20 of its £100 extra cost is overhead; the rest is materials and labour. Sharing the actual £370,000 of overhead by machine hours would give about £250 and £354 a unit instead, but that is actual costing and cannot be done until the year is over. A predetermined rate lets the business cost and price its products during the year, and the gap is settled once, at the end.

Was Overhead Under- or Over-Absorbed, and by How Much?

Under-absorbed, by £60,000. The products absorbed £310,000 of overhead (62,000 machine hours at £5) against £370,000 actually incurred. The hours matched the budget, so the whole shortfall is spending above budget. In the management accounts the £60,000 is charged to the income statement as an extra cost of the period; the year-end accounts treat it differently, as explained below.

In the management accounts the rule is absorbed overhead = rate × actual activity, compared with actual overhead. When actual is higher, overhead is under-absorbed and profit falls; when absorbed is higher, it is over-absorbed and, as ACCA's examining team puts it, the difference is added back to profit. Comparing actual with budgeted overhead works here only because the hours were on budget: at 60,000 hours the products would absorb £300,000, and the under-absorption would be £70,000.

The year-end accounts draw the line differently. Under IAS 2 Inventories, production overhead actually incurred goes into the cost of the units made, with fixed overhead spread over the plant's normal capacity (paragraphs 12 and 13), and a predetermined rate may stand in only if the result approximates cost (paragraph 21). With hours on budget, the £60,000 overspend becomes part of the cost of Products B and C and reaches profit as those units are sold, unless part of it is abnormal waste, which paragraph 16 expenses at once. Paragraph 13's rule that unallocated overhead is expensed covers low production or idle plant: at 60,000 hours against a normal 62,000, the idle hours' share of fixed overhead would be expensed in the period.

How Do Absorption and Marginal Costing Change Product D's Profit?

With the brief's figures they do not: both methods give a profit of £22,000, because the brief gives no inventory, so every unit made is treated as sold. Absorption costing puts the £6,000 of fixed production overhead into the cost of each unit; marginal costing charges it as a period cost. With no inventory left over, both charge the whole £6,000 to the same period.

The £2,000 of fixed administration costs is a period cost under both methods. Only production overhead can sit inside inventory, so treating "fixed costs" as one block, as many answers do, blurs the one difference the question is testing.

What Happens When Inventory Changes?

The two profits part as soon as inventory moves. To show it, suppose (our figures, not the brief's) that the costs above are for 1,000 units made, the selling price is £60, and only 800 units are sold. Variable cost is £30 a unit and fixed production overhead £6 a unit (£6,000 ÷ 1,000).

Absorption vs marginal costing for Product D

Point of comparison	Absorption costing	Marginal costing
Cost of one unit	Absorption costing £36: variable cost of £30 plus £6 of fixed overhead	Marginal costing £30: variable cost only
Fixed production overhead	Absorption costing Shared over the units made; part waits in inventory	Marginal costing Charged in full to the period
200 units in closing inventory	Absorption costing £7,200	Marginal costing £6,000
Profit if 800 of 1,000 units sell	Absorption costing £17,200	Marginal costing £16,000
Profit if every unit sells (the brief's case)	Absorption costing £22,000	Marginal costing £22,000
Where it is used	Absorption costing Published accounts, as IAS 2 requires	Marginal costing Internal decisions: pricing, special orders, which product to push

The reconciliation: absorption profit less marginal profit = change in inventory × fixed overhead per unit = (200 − 0) × £6 = £1,200. Absorption costing carries £1,200 of this month's fixed overhead forward in the 200 unsold units; marginal costing charges all £6,000 now. When those units sell, the effect reverses and marginal costing reports the higher profit, the reasoning ACCA's MA2 examiner's report walks through. Over any run of periods in which total production equals total sales, the two methods give the same total profit, a point the F2/FMA examiner's report says few candidates saw.

Which Costing Method Should the Business Use?

Both, for different jobs. Published accounts must include fixed production overhead in inventory: IAS 2, paragraphs 12 and 13, requires a systematic allocation of fixed production overheads to the cost of inventory, based on the normal capacity of the production facilities. Inside the business, marginal costing is the better tool for decisions, because contribution shows what one more unit adds before costs that will be paid whatever is decided: Product D contributes £30,000, half of every pound of sales, towards £8,000 of fixed costs. "Use marginal costing" is right for pricing a special order or choosing which product to push, and wrong for the year-end accounts.

How Would a Marker Grade This Assignment?

Most marks sit in the workings: a trial balance that agrees, adjustments posted to the ledger and carried into all three statements, and costing at a predetermined rate. Prose earns marks where it argues a judgement, such as the £3,300 classification or the choice of business form. These errors cost the most marks on a brief like this:

• A trial balance that does not agree, and statements built on it anyway.
• Adjustments that never reach the ledger: statements built from adjusted figures while the ledger holds the unadjusted ones.
• A label that contradicts the entry: calling income "unearned" and then listing it as an asset. Unearned income is a liability; income earned but not billed is accrued income, an asset.
• Headings that misdescribe the statement: an income statement is "for the month ended", a balance sheet is "at" a date, and the statement of owner's equity is a statement of its own.
• Actual overhead in unit costs: sharing actual overhead by machine hours, then comparing it with the budget, mixes two methods; absorb at the budgeted rate and compare absorbed with actual.
• A rule stated without its condition: "absorption costing gives a higher profit" is true only when inventory rises.
• The wrong country's law: an "LLC" is a US form; a sterling brief needs sole trader, partnership, LLP, Ltd and plc.
• Citations chosen for a word in their title: a study of the "marginal" Arctic seas says nothing about marginal costing; cite the standard or a professional body.

Need help with a similar accounting assignment, from journal entries and the trial balance to absorption and marginal costing? Message us on WhatsApp with your brief and deadline. Our accounting assignment help covers financial and management accounting tasks, more worked answers are in our MBA assignment samples, and for the investment side of a finance module see our investment analysis sample with the Sharpe ratio.

Sources

• ACCA (2014) Examiner's report: F2/FMA Management Accounting, July to December 2014. Association of Chartered Certified Accountants. accaglobal.com (accessed 13 October 2026).
• ACCA (2020) Examiner's report: MA2 Managing Costs and Finance, September 2019 to August 2020. Association of Chartered Certified Accountants. accaglobal.com (accessed 13 October 2026).
• ACCA (n.d.) Fixed overhead absorption, technical article written by a member of the management accounting examining team. accaglobal.com (accessed 13 October 2026).
• Companies House (2026) Life of a company: part 2, event driven filings, sections 1.4, 7.2 and 7.4, updated 1 February 2026. gov.uk (accessed 13 October 2026).
• GOV.UK (n.d.) Become a sole trader. gov.uk (accessed 13 October 2026).
• GOV.UK (n.d.) Set up a business partnership. gov.uk (accessed 13 October 2026).
• GOV.UK (2026) Set up and run a limited liability partnership (LLP), updated 2 September 2026. gov.uk (accessed 13 October 2026).
• GOV.UK (n.d.) Set up a private limited company. gov.uk (accessed 13 October 2026).
• GOV.UK (n.d.) Running a limited company: your responsibilities. gov.uk (accessed 13 October 2026).
• IFRS Foundation (n.d.) IAS 2 Inventories, paragraphs 10 to 13 on the cost of inventories, costs of conversion and fixed production overhead; full text free to registered users. ifrs.org (accessed 13 October 2026).
• IFRS Foundation (n.d.) IFRS 15 Revenue from Contracts with Customers. ifrs.org (accessed 13 October 2026).