Question

What are adjusting entries and why are they necessary?

Short answer

Adjusting entries are the entries prepared at the end of the financial period that records any unrecognized income or expenses for the period. Adjusting entries are necessary to revise all the account balances before the formation of financial statements.

Step-by-step solution

Meaning of adjusting entries

Adjusting entriesare the entries of the adjustments mentioned outside the trial balance and enable the users to assess the true financial position, that is, profit or loss of the firm.

As per the double-entry system, all the adjustments shown outside the trial balance are reported in two places. Adjusting entries are mostly prepared on the last day of the financial period.

Importance of adjusting entries

Adjusting entries are important in the following ways:

• It is required to check whether the matching principles and revenue recognition are followed are not.

• With the help of adjusting entries, it is possible to record accurate amounts on the balance sheet as well as on the income statement.

• Adjusting entries help us to list omitted entries and assists in reforming all those errors.

Hence, these are the points that highlight the requirement of adjusting entries.