ADJUSTING ENTRIES

Adjusting Entries

Adjusting Entries

Question 1)

Adjusting entries are those entries which are made on the last day of the accounting period i.e. monthly, quarterly or yearly. The reason to make these entries is to adjust the account balance at the end of closing period. Moreover, this also reflects the revenue and expenses that has been earned and spends during the accounting period. In order words, they are those entries that convert the accounting record of t he company in to the accrual basis. They are made just prior to issuing a financial statement of the company. Adjusting entries are entries required to adjust the balance of certain general ledger accounts at the end of year. These entries must absolutely be recorded in the general journal and subsequently reported to the general ledger prior to the preparation of financial statements (Jerry J. Weygandt, Paul et al., 2010).

Mostly, these entries are required in order to achieve a clean cut-off at the end of the accounting period. However, it also ensures that the accounts are complete and accurate. When an accountant is posting financial transaction in to the current account balances, there are possibilities of recording wrong or incorrect figures or figures are not updated due to certain problems. For instances, posting of the transactions in to wrong accounting heads; or conflict in timing while recording the expenses and revenues between the cash and accrual basis of accounting. Adjusting entries can be permanent or temporary. Temporary adjusting entries are those which can be reversed for the purpose of making adjustment or other entry is made. Moreover, the company ensures the principle of independence (specialization) exercises.

We must, therefore, determine the time of closing of accounts and make the line between the elements that affect the current year and those for the following year. We must also consider the continuous nature of the charges since some operations (and products) are engaged in a gradual manner, such as wages, interest on loans, insurance and we do not store the scriptures daily for these operations.

Question 2)

The four basic adjusting entries are accrued revenues, unearned revenues, accrued expenses and prepaid expenses.

Accrued Revenues

Accrued revenues are also termed as accrued assets. These are those revenues which have been already earned by the company; however, the buyer hasn't paid the amount for the services. In order words, the good or service has been sold or completed, but company has not received the amount neither it is posted in the general ledger. In short, revenue that has been earned by did not receive. For instances, rent for the month which is due on the tenant.The adjusting entry will be made for this in order to identify the revenue which is not earned as yet. Moreover, reverse entry made when the tenant will make the payment.

Accrued Revenue 25,000

Revenue 25,000

Unearned Revenue

This is also termed as deferred revenue. These are those revenues that are collected in cash and entered as a liability before being earned. In order words, these are those revenues for ...