Question

describe at least two typical adjusting entries a service-type business would need to record to bring account balances up-to-date. For your examples, one of the adjusting entries should be an accrual and another a deferral. You may use similar examples as those in your textbook and you may also research other typical adjusting entries for service-type companies. Be sure to address the following questions:

What are the purposes of each of your example adjusting entries?

Why are these adjusting entries required?

What if the company does not record these adjusting entries? Would financial statements be accurate? Why or why not?

Should the adjusting entries described be posted to the general ledger before preparing an adjusted trial balance? Why or why not?

Answer 1

Accrual of expenses or income refers to the reporting of expenses or income and related liability or receivable in the period to which they pertain. For example you have incurred interest in a period but not paid/accounted for because you have not received details from your lender. In this case to report the expense you need to book the interest expenses and related liability during the period to which it pertains. Further deferrral arises when you receive the revenue or or made the payment in current accounting period which relates to subsquent accounting period. Therefore needs to be reported in subsequent accountiong period. For example you paid/received rent for six months but have close the books in two months. There you need to defer and report income/expense and related liability/advance of four months in susquent period.

Considering the above explanation we can answer below question as follows:

What are the purposes of each of your example adjusting entries?

The purpose of adjusting entries to report the income or expense and related liability and advance in the period to which it pertains.

Why are these adjusting entries required?

To show correct Income or Expenses and Financial posion for the and at the end of the period.

What if the company does not record these adjusting entries?

If the Company does not record these adjusting entry it would result in reporting of under/over statement of Income/expenses and Assets and liabilities in an accounting period.

Would financial statements be accurate? Why or why not?

No.

If the Company does not record these adjusting entry it would result in reporting of under/over statement of Income/expenses and Assets and liabilities in an accounting period.

Should the adjusting entries described be posted to the general ledger before preparing an adjusted trial balance? Why or why not?

Yes, adjusting entries should be posted in general ledger before preparing an adjusted trial balance to report the income and expense and related liability and advance in the period to which it relate.

Although passing of adjusting entries can be avoided by taking various measure like paying the rent only for the period to which it related instead of subsequent periods etc.