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Why are adjusting entries necessary - Essay Example

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Adjusting entries are the journal entries that are used in accounting to help change the financial accounting records of the company to the accrual basis of the accounting. These adjusting journal entries are prepared typically in advance before the company issues the financial…
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Why are adjusting entries necessary
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Download file to see previous pages A situation that requires an adjustment entry is when an amount in the accounting records of the company has already been recorded but the amount is realized that it is far more than the current accounting period. Consequently, there are other situations that the adjusting journal entries may be required before the company issue the financial statements for example a situation when there is nothing that has been entered into the accounting records for a particular expense or revenue that did occur and require that they are included in the income statement and the balance sheet of the current period. Another situation is when some amount of money has already been entered in the accounting records but it needs to be divided between two or more accounting periods.
Adjusting entries are used to measure income and financial position of the company or organization in a very useful and relevant way. For example if the management of the company would wish to know the much they earned during the last few months or years and even its liabilities and assets at particular date. This makes it a necessary reason for making the entries that will indicate the actual and realistic positions to the users. The procedure for making these adjustments and entries must be complete and consistent at the end of each accounting period (Lypko, 2013). Therefore the accountants must ensure that they make these adjustments by analyzing thoroughly the accounts and determine which account requires adjustment.
Adjusting entries allows financial statements to be compared through different accounting periods (matching rule). Management of the company can use the adjustment entry journal to analyze whether the company is making progress in terms of earning profits or improving its financial position. For example if the accrued salary expense for a given month is ...Download file to see next pagesRead More
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