Accounting Question...Why is it important for a company to have Adjusting Entries?

Question

Is an Ajusting entry mainly for organization?

Answer 1

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. Any entity which keeps accounts on the accruals basis would require adjusting entries.

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Answer 2

There must be adjustments made to bring some of the accounts up to date. Accruals, deferrals etc. must be brought up to date so the financial statements, etc. will present an accurate balance. Other wise, the income statement, or balance sheet might be overstated or understated. In which case, an accurate evaluation of the business or corporation would not be possible.

Accounts like accumulated depreciation, supplies, prepaid's,
unearned revenue, and wages expense are just a few of the accounts which might be effected, and require adjustments.

An example might be equipment, which is listed on the balance sheet under plant, property and equipment:

If equipment was debited for let's say, 100,000. with 25,000.
contra to it or as a credit, in accumulated depreciation, it would not be a fair assumption at the end of the year to calculate the book value to be 75,000. The depreciation expense for the year would need to be calculated by what ever method was being used, and an adjustment made.
Lets just say the depreciation for the year was 10,000.

dr depreciation expense 10,000.
cr accumulated depreciation 10,000.

This would bring the accumulated depreciation up to date with a 35,000. credit balance and a book value equal to 65,000.

This would keep the balance sheet from being overstated.

Also, the depreciation expense would show on the income statement resulting in a lower net income.

I hope this helps.