Question

Why must one understand accrual basis accounting and how does this process play a huge role in the adjusting entry process?

What are the five types of adjusting entries? Define each type and provide an example of each.

Answer 1

Sollution: (A)-Why must one understand accrual basis accounting and how does this process play a huge role in the adjusting entry process?

1)accrual basis accounting works on matching principle that states revenue to be recognised in the period in which expense is incurred. therefore the need of adjusting entries arises.

2)The accrual accounting is a system used by companies to record their financial transaction at the point when they occur regardless of whether a cash transfer has been made. It is unlike cash accounting in which transaction is deemed as valid for recording when cash is actually received or paid.

3) Before financial statements are prepared, additional journal entries, called adjusting entries, are made to ensure that the company's financial records adhere to the revenue recognition and matching principles. Adjusting entries are necessary because a single transaction may affect revenues or expenses in more than one accounting period and also because all transactions have not necessarily been documented during the period.

4)Adjusting entries are required at the end of each fiscal period to align the revenues and expenses to the “right” period, in accord with the matching principle in accounting. In general, there are two types of adjusting journal entries: accruals and deferrals. Adjusting entries generally occur before financial statements are released. so adjustment entries play very big role.

5) It makes financial information more reliable and more accurate.

(B):-What are the five types of adjusting entries:-The adjusting entries are recorded in order to make    adjustments required under the accrual basis of accounting. The five types of adjusting entries are explained as below:

  1) Deferred revenues:Deferred revenues are the revenues that are not earned yet but are received incash.   

For example, an Unearned revenue account is a deferred revenue account and will be reported as a current liability. The journal entry will be as follows:

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 20XX	Cash	xxx
	Unearned fees		xxx
	(to record cash received from the customer for services yet to be performed)

2)Deferred expenses: Deferred expenses are the expenses that are paid but are not yet incurred.

For example, rent paid in advance is a deferred expense account and will be reported as a current asset. The journal entry will be as follows:

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2020	Prepaid rent	xxx
	Cash		xxx
	(to record rent paid in advance)

3) Accrued revenues: Accrued revenues are the revenues that are earned but yet to be received.

For example, credit sales made is an accrued revenue account and is recorded in the balance sheet as a current asset. The journal entry is as follows:

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2020	Accounts receivables	xxx
	Credit sales		xxx
	(to record credit sales made)

4) Accrued expenses: Accrued expenses are the expenses that are incurred but yet to be paid.

For example, unpaid salaries is an accrued expense account and are recorded in the balance sheet as a current liability. The journal entry is as follows:

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2020	Salaries expense	xxx
	Salaries payable		xxx
	(to record salaries expense yet to be paid)

5)Depreciation expense: Depreciation expense is the expense charged against the asset for use of the asset for the current period.

For example, depreciation expense is an income statement account. The journal entry is as follows:

Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2020	Depreciation expense	xxx
	Accumulated depreciation -equipments		xxx
	(to record depreciation expense for the year)