Question

In: Accounting

What is the purpose of making adjusting entries? Do adjusting entries affect income statement accounts, balance...

  • What is the purpose of making adjusting entries?
  • Do adjusting entries affect income statement accounts, balance sheet accounts, or both? Explain.

Solutions

Expert Solution

Answer:

Meaning of adjusting entries:

Adjusting entries are the entries that are made to update the accounts and bring them to their correct balances.

Purpose of making adjusting entries:

The main purpose of making adjusting entries is to update the accounts to conform with accrual concept. At the end of the accounting period, some income or expenses may not been recorded,taken up or updated, hence there is a need to update.

If adjusting entries are not made then some income or expenses may not show their correct value that's why adjusting entries are important to show correct amount.

Yes, adjusting entries affect income statement accounts and balance sheet accounts both as follows

The income statement shows the company's revenues and expenses over a period of time. The adjusting entries aims to match the revenues and expenses to match the balances.

The balance sheet of a company shows the financial position of the company of a particular year. By correcting the revenues and expenses, adjusting entries adjust the liabilities and owner's equity based on this...

Thus, adjusting entries affect both income statement accounts as well as balance sheet accounts.


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