Question

During the week, we will explore the differences between cash-basis and accrual-basis accounting, and learn the steps required to complete the accounting cycle. With that in mind, let's begin by discussing the following question:

Why do companies make adjusting entries? When are adjusting entries made and at what point in the accounting process?

Answer 1

Adjusting entries are are made to accurately record all expenses and revenue of the company. There are certain transactions which have like accrued interest or revenue which the company would realize when all the entries based on the documents and transactions have been recorded. Adjusting entries are made by the company so as to prepare accurate statement of financial statement by recording all the expenses and revenue like adjusting accrued interest on debt, adjusting prepaid expenses paid, recording depreciation expense, adjusting the unearned revenue and so on.

The adjusting entries are made at year end after preparation of unadjusted trail balance. The adjusting entries are part of fourth accounting cycle process. The first accounting process is passing journal entries for transactions, second step is posting the entry into ledger account, the third step is preparing the trial balance based on the ledger account. After the preparation of trial balance, the adjusting entries are made by reviewing the trial balance for any expenses or revenue not recorded which are accrued during the year.