Question

Explain the importance of providing adjusting entries.

Answer 1

The adjusting entries are those entries which is recorded at the end of the accounting period. The preparation of these adjusting entries is an application of accrual concept and matching principle.

The accrual concept defines that the income should be recognises when it is earned regardless of when they are collected. Similarity the expenses are recorded when it is incurred regardless of when they are paid.

The matching principle says that it need to align expenses with revenues. That is, if an income is recorded, then the expense incurred for that income need to be recorded in the same period itself.

The main purpose of the adjusting entries is to update the accounts to confirm with accrual concept. At the end of period, some expenses, or income may not have been recorded. So there is a need to update the accounts by providing necessary adjusting entries. If adjusting entries are not prepared, then some expense or income or asset or liability may not reflect their true value in the financial statement. We need to make the financial statement better form and in better view. So adjusting entries are major factor for this. One of the adjusting entry is recording the depreciation expense. It is a non cash expense recorded in income statement. If this is not recorded then the income will be overstated and it doesn't reflect true values in the financial statement.

SUMMARY:

Adjusting entries are important because it helps to reflect the true values in the financial statement. For that we need to strictly follow the accrual and matching principle so that we can achieve a better financial statement.