Question

- Why are adjusting entries important?

-What are the consequences of not booking adjusting entries at the end of the accounting period?

Answer 1

a) Adjusting entries helps in closing the accounts balances at reporting period end. Without adjusting entries entities can't complete financial statements in a complete way. Example of adjusting entries includes accrual of administrative expenses like rent at month end.

Importance of adjusting entries are as follows-:

(i) Adjusting entries helps the entities in displaying more accurate picture of the financial performance at the reporting period end. Any error or misstatements are corrected after passing the adjusting entries.

(ii) Stakeholders can rely on the financial performance in more comfortable way since all the entries has been recorded.Accordingly stakeholders can make decisions on the basis of adjusting entries.

(iii) Matching principle is perfectly applied by the help of passing journal entries.

b) There can severe impact on the financial statements if adjusting entries are not book at the time of closure of books of accounts. Matching principle can only be followed if we pass all the adjusting entries. For revenue and all its related cost must be booked in the same period. Month end wages paid must be booked before finalising the financisl statement. Stakeholders and particularly Management will not be able to take correct decisions if they can't get accurate financial performance of the Company. All the account balance might over or understated due non-passing of ajusting entries. Hence it is very important to pass each and every adjusting entry at the perod end.