Question

Why adjustments must be made at the end of an accounting period and give examples of two adjustments. What must be prepared to check or verify that adjustments have been properly recorded ?

Answer 1

Adjusting entries are made at the end of the accounting year to record the income and expenses that are earned and incurred irrespective of amount received or paid. Even though amount is not received or paid those transactions should be recorded.

Example 1 - Interest income is received on March 31st and September 30th. For the year ending on December 31st, interest income for October, November and December is earned but will be received in the next year on March 31st. So interest income of October, November and December should be recorded as revenue.

Example 2 - Salaries are paid on 10th of every month. In the month of December, salaries from 11th to 31st will be paid on January 10th. The salary expense relating to those 20 days (ie. from Dec 11th - Dec 31st) should be recorded as expense even though the payment is not yet made.

Recorded transactions in the above mentioned manner is known as ACCRUAL BASIS.

While recording adjustment entries one should check whether all the expenses and incomes irrespective of amount received or paid are recognised for the period.