Question

1. Explain why adjusting entries are needed, and identify two key things that should be kept in mind when preparing them.

2. Explain why closing entries are made. What are the two objectives that are accomplished by making closing entries?

3.In general terms, explain the purpose of the statement of income and the statement of financial position. Outline the type of information that each statement presents, and explain the basic difference between the types of items that appear on the statement of income and those that appear on the statement of financial position.

Answer 1

1. Adjusting entries are required so that the financial statements correctly represent the revenue earned and the expenses incurred during the accounting period. The two key things that should be kept in mind while preparing them are:

- The correct accounts should be debited or credited.

- The net effect should be to apply the matching princple properly.

2. Closing entries are made for the purpose of preparing financial statements. The two objectives that are accomplished by making closing entries are as follows:

- To ensure that the all revenue and expense accounts begin with a zero balance in the next period.

- All temporary accounts are closed.

3. The purpose of an income statement is to report a company's financial performance over a specific accounting period. The purpose of the financial position is to communicate to the stakeholders the current status of the business. The income statement reports revenues and expenses whereas the statement of financial position reports assets and liabilities.