Q. What is adjusting entry? Why necessary it?
Or. Reason of adjusting entry
Adjusting entries: Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a company's financial statements.
To demonstrate the need for an accounting adjusting entry let's assume that a company borrowed money from its bank on December 1, 2011 and that the company's accounting period ends on December 31. The bank loan specifies that the first interest payment on the loan will be due on March 1, 2012. This means that the company's accounting records as of December 31 do not contain any payment to the bank for the interest the company incurred from December 1 through December 31. (Of course the loan is costing the company interest expense every day, but the actual payment for the interest will not occur until March 1.) For the company's December income statement to accurately report the company's profitability, it must include all of the company's
December expenses—not just the expenses that were paid. Similarly, for the company's balance sheet on December 31 to be accurate, it must report a liability for the interest owed as of the balance sheet date. An adjusting entry is needed so that December's interest expense is included on December's income statement and the interest due as of December 31 is included on the December 31 balance sheet. The adjusting entry will debit Interest Expense and credit Interest Payable for the amount of interest from December 1 to December 31.
Why need: Adjusting Entries are journal entries that are made at the end of the accounting period, to adjust expenses and revenues to the accounting period where they actually occurred.
Generally speaking, they are adjustments based on reality, not on a source document. This is in sharp contrast to entries during the accounting period (such as utility bills or fees for services rendered) that depend on source documents.
Or. Reason of adjusting entry
Adjusting entries: Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a company's financial statements.
To demonstrate the need for an accounting adjusting entry let's assume that a company borrowed money from its bank on December 1, 2011 and that the company's accounting period ends on December 31. The bank loan specifies that the first interest payment on the loan will be due on March 1, 2012. This means that the company's accounting records as of December 31 do not contain any payment to the bank for the interest the company incurred from December 1 through December 31. (Of course the loan is costing the company interest expense every day, but the actual payment for the interest will not occur until March 1.) For the company's December income statement to accurately report the company's profitability, it must include all of the company's
December expenses—not just the expenses that were paid. Similarly, for the company's balance sheet on December 31 to be accurate, it must report a liability for the interest owed as of the balance sheet date. An adjusting entry is needed so that December's interest expense is included on December's income statement and the interest due as of December 31 is included on the December 31 balance sheet. The adjusting entry will debit Interest Expense and credit Interest Payable for the amount of interest from December 1 to December 31.
Why need: Adjusting Entries are journal entries that are made at the end of the accounting period, to adjust expenses and revenues to the accounting period where they actually occurred.
Generally speaking, they are adjustments based on reality, not on a source document. This is in sharp contrast to entries during the accounting period (such as utility bills or fees for services rendered) that depend on source documents.
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