In: Accounting
Some accounts do not need to be adjusted at the end of the period, since the day-to-day transactions provide all the data for these accounts.
A) True
B) False
Explain the answer
The Answer is B - False
Adjusting entries are journal entries that are usually made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred. The revenue recognition principle is the basis of making adjusting entries.
According to accrual concept of accounting, revenue is recognized in the period in which it is earned and expenses are recognized in the period which they are incurred. Some business transactions affect the revenue and expenses of more than one accounting period.
All revenue received or all expenses paid in advance cannot be reported on the income statement of the current accounting period. They must be assigned to the relevant accounting periods and must be reported on the relevant income statements.
The purpose of adjusting entries is to assign appropriate portion of revenue and expenses to the appropriate accounting period. By making adjusting entries, a portion of revenue is assigned to the accounting period in which it is earned and a portion of expenses is assigned to the accounting period in which it is incurred.
It ensures that only the relevant revenue and expenses are reported in the income statement of a particular accounting period.