Question

In 200 words or more, how does adjusting entries affect entries for deferrals, entries for accruals, the trial balance and closing entries? Original work please.

Answer 1

Adjusting entries are the year end adjustments to be made for accruals, deferrals, prepaid expenses, depreciation. Without these adjustments while the trial balance and the balance sheet would tally but the trial balance shown would not be the correct trial balance as with adjusting entries the debit and credit of the accounts increases. Say for example, the company has $ 6000 wages which are incurred during the year and $ 5000 wages has been paid but $ 1000 wage expense is yet to be paid, this will call for adjustment as the wages recorded for current year would be $ 6000 the expense incurred of which $ 5000 of cash would be credited and balance $ 1000 would be paid next year so a liability would be created of $ 1000 which will lead to cash outflow next year. If this $ 1000 adjustment is not made the liabilities would be understated by $ 1000. Hence the liabilities shown would not be correct. Also due to not recording of $ 1000 as Wages expense the profit would be overstated by $ 1000 which would ultimately lead to tally of balances but the accounting would not be correct. Hence, it is necessary to make adjustments to these deferrals and accruals otherwise the books of accounts would not be correctly maintained. Another example could be where the company had received advance for performing of services which are now perform this year, this will lead to reversal of liability which was created last year for unearned service revenue and this year service revenue would be recognised which will lead to increase in revenue for the company and decrease in liability of the company. Based on the adjustments the closing entries would also be impacted since the impact would have either on expense or income of the company and accordingly income summary would change.