Question

Why are adjusting entries needed? What accounting concepts require thatadjusting entries be employed? For each of the four categories of adjustingentries, describe the business activity that produces circumstances requiringadjustment.

Answer 1

Adjusting entries are needed to adjust the balances of different accounts to adhere with the accrual basis of accounting. Without adjusting entries it would not be possible to compute the amount of profit and loss in the profit and loss account of an organization. The concept of accrual basis of accounting requires adjusting entries to be employed. The adjusting entries are primarily divided into four categories, these are accrued revenues, unearned revenues, accrued expenses and prepaid expenses.

Accrued revenues: Services provided but amount yet to be received from customers is a situation where adjusting entry has to be made to record assets for accrued revenues in the books of accounts.

Unearned revenue: Amount received from customers as advance for services to be provide in the future is an example where adjusting entries have to be made to ensure that liability is recognized for unearned revenue in the books of accounts.

Accrued expenses: In case expenses are incurred but not paid in such situation adjusting enters have to be made to record liabilities for such unpaid expenses.

Prepaid expenses: Expenses paid in advance is to be recorded in the books of accounts by recording adjusting entries in the books of accounts.