Question

The president of Crown Construction was informed that the first quarter financial statements would be available "as soon as the adjusting entries are made." Being a non-accountant, the president feels adjustments should not be necessary if the accounting department is operating in a competent manner. Does the need for adjusting entries at the end of the quarter imply that transactions are not being recorded properly? Explain.

Answer 1

Answer to question

Adjusting entries are usually made on the last day of an accounting period (year, quarter, month) so that a company's financial statements comply with the accrual method of accounting. In other words, the adjusting entries are needed so that a company's:

· Income statement reports the revenues that have been earned during the accounting period

· Balance sheet reports the receivables that it has a right to receive as of the end of the accounting period

· Income statement reports the expenses and losses that were incurred during the accounting period

· Balance sheet reports the liabilities it has incurred as of the end of the accounting period

Adjusting entries are necessary to update all account balances before financial statements can be prepared. These adjustments are not the result of physical events or transactions but are rather caused by the passage of time or small changes in account balances.

If the adjusting entry is not made, assets, owner's equity, and net income will be overstated, and expenses will be understated. Failure to do so will result in net income and owner's equity being overstated, and expenses and liabilities being understated.

Yes , the need for adjusting entries at the end of the quarter imply that transactions are not being recorded properly. So adjusting entry are important for every company.