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Chapter 3: Question 11Q (page 127)

What are adjusting entries and why are they necessary?

Short Answer

Expert verified

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

01

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.

02

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.

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Most popular questions from this chapter

The financial statements of (M&S) are presented in Appendix E. The company's complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to M&S鈥檚 financial statements and the accompanying notes to answer the following questions.

(a) What were M&S鈥檚 total assets on 28 March 2015? On 29 March 2014?

(b) How much cash (and cash equivalents) did M&S have on 28 March 2015?

(c) What were M&S鈥檚 selling and marketing expenses in 2015? In 2014?

(d) What were M&S鈥檚 revenues in 2015? In 2014?

(e) Using M&S鈥檚 financial statements and related notes, identify items that may result in adjusting entries for prepayments and accruals.

(f) What were the amounts of M&S鈥檚 depreciation and amortization expense in 2014 and 2015?

Indicate whether each of the following items is a real or nominal account and whether it appears in the balance sheet or the income statement.

(a) Prepaid Rent.

(b) Salaries and Wages Payable.

(c) Inventory.

(d) Accumulated Depreciation鈥擡quipment.

(e) Equipment.

(f) Service Revenue.

(g) Salaries and Wages Expense.

(h) Supplies.

Becker Ltd. is planning to adopt IFRS and prepare its first IFRS financial statements at December 31, 2018. What is the date of Becker鈥檚 opening balance sheet, assuming one year of comparative information? What periods will be covered in Becker鈥檚 first IFRS financial statements?

Is it necessary that a trial balance be taken periodically? What purpose does it serve?

E3-3 (L02) (Corrected Trial Balance) The following trial balance of Blues Traveler Corporation does not balance.

BLUES TRAVELER CORPORATION

TRIAL BALANCE

APRIL 30, 2017
Debit Credit

Cash \( 5,912Accounts Receivable 5,240Supplies 2,967Equipment 6,100Accounts Payable \) 7,044Common Stock 8,000Retained Earnings 2,000Service Revenue 5,200Office Expense 4,320

Total \(24,539 \)22,244

An examination of the ledger shows these errors.1. Cash received from a customer on account was recorded (both debit and credit) as \(1,380 instead of \)1,830.2. The purchase on account of a computer costing \(3,200 was recorded as a debit to Office Expense and a credit to AccountsPayable.3. Services were performed on account for a client, \)2,250, for which Accounts Receivable was debited \(2,250 and ServiceRevenue was credited \)225.4. A payment of \(95 for telephone charges was entered as a debit to Office Expense and a debit to Cash.5. The Service Revenue account was totaled at \)5,200 instead of $5,280.InstructionsFrom this information prepare a corrected trial balance.
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