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Accounting project - Essay Example

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Just as we can find out about the health of a person by taking his temperature and having other tests such as X-rays, cardiograms and body mass index calculated, we can also determine the health of a business by looking at…
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Download file to see previous pages Accrual basis of accounting assumes that business will be done by both cash and credit. In these circumstances, there might be some unfinished or incomplete transactions at the end of every month or year. For example, salaries to workers are paid every Thursday evening but the present year ends on Tuesday, Dec 31. In such a circumstance, salary from last Friday to this Tuesday (5 days) has been earned by the workers, although we will pay them next Thursday 02 Jan. If we want to provide an accurate picture of the accounts as of Dec 31, we will take 5 days salary as payable up to Dec 31 and 2 days payable in the New Year. This accrual of 5 days salaries as of Dec 31 is an adjusting entry which helps us record salaries payable to workers as of that date. Under cash basis accounting this entry would be unnecessary since no cash would have been paid out till Jan 02 of the New Year (Accounting Coach, 1).
From the above, it is abundantly clear about the nature and need for adjusting entries. Adjusting entries are needed to reflect a correct picture of the accounts as of the end of the year (Meigs et al, 153). Since most businesses have Dec 31 as the closing date for the year, this is the date at which their adjusting entries are made. However the accounts may be closed at any other date during the year, June 30 or Sep 30 for example and so adjustments are typically made at that date for these businesses. There may be different types of adjusting entries required. The following are the most usual kinds of adjusting entries that are seen in the business arena:
One important peculiarity is that it is often seen that under the double entry system of accounting, where every debit has a credit, of the two accounts used in an adjusting entry, one is typically an Income Statement account while the other will be a Balance Sheet account. We usually have to create one of these accounts to record the complete ...Download file to see next pagesRead More
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