Question

Explain the statement: "The adjusting process is necessary for reporting the financial statements on an accrual basis." Select one of the following four categories of adjusting entries (prepaid expenses, unearned revenues, accrued expenses, accrued revenues) and explain why this type of adjustment is needed. What are some of the typical accounts that are affected by this type of adjusting entry? What are some of the typical entries prepared during the adjusting process?

Answer 1

Solution:-

Yes , I am totally agree with this statement that "The adjusting process is necessary for reporting the financial statements on an accrual basis ". There are several transactions made during the year which is not related for that year but is needed for certain reasons like sometimes we paid rent in advance , salary in advance , expenses in advance but these expenses are not for that particular financial year so we have to adjust these transactions in the year end so that financial statements must be prepared as per accrual basis .

In those four items I am selecting Prepaid expenses for which adjustment is needed before closing the financial statements.

As per the name prepaid expenses are shown as assets in the balance sheet and it must be amortized over a period of time as per accrual basis.

Prepaid expenses are those expenses which are paid in advance like in the above examples.

Some of the typical accounts that are affected by this are:-

rent paid in advance

salary given in advance

prepaid telephone expenses paid in advance

insurance expenses paid in advance

Some of the typical entries prepared during adjustments are:-

Prepaid rent A/c Dr

To Bank A/c

Prepaid Insurance A/c Dr

To Bank A/c

etc.