Question

For your main Discussion post, 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

Adjustment entries are made usually at the end of the accounting period ( year, quarter , month) so that companies financial statements are comply accrual method of accounting.

Accrual method of accounting means, Income and Expenses should be reported in the financial statement for the period in which they are pertains.

Two Examples of Adjustment Entries in a service type business.

A. Accruals - Consulting firm provide service to his client but accounting records do not yet contain the revenue or receivables.

Accrued Receivables A/c Dr. XX

To Service Revenue A/c XX

B. Deferral - Consulting firm paid insurance on its vehicle for the six month period starting from 1 jan XXXX that is 1st day of next year.

Insurance Expenses A/c Dr. XX

To Prepaid Insurance A/c XX

* Purpose of both entries of our example is to recognize income or expenditure related to current reporting period and not recognized due to non received/raised of any invoices or related to next reporting period to comply the accrual system of accounting in the preparation of financial statements.

*Adjustment entries are required to do at the end of the accounting period ( yearly, quarterly, monthly) because all the revenue / expenses recognized for the accounting period in which they pertains to reflect the actual position of the income statement of the organisation.

Further adjustment entries are required to do because organisation has to comply the concept of accrual system of accounting.

* If adjustment entries are not record by the company than company will restate his financial statement or adjustment should be made in the next year financial statement subject to nature,amount, importance, legal nature of the transaction.

without doing adjustment entries financial statements are not accurate. financial statement may be over valued if expenses are not recorded or undervalued if revenue are not recorded.

* yes, Adjustment entries described be posted to the general ledger before preparing an adjusted trail balance because all the effect of the adjustment entries should be given to general ledger and after the impact of adjustment entries whether it will be revenue or expenses it will reported accurate picture of the organisation financials statement.