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Understand & explain the Accounting Equation and its components - Essay Example
Finance & Accounting
Pages 3 (753 words)
Adjusting Entries refers to journal entries which are madeto adjust or modify expenses and revenues concerning their period of occurrence. These adjusting entries usually takes place at the end of an accounting period , normally done after the preparation of a trial balance…
Understand & explain the Accounting Equation and its components
Furthermore, it makes sure that financial statements reflect acrual basia of accounting. Adjusting entries are necessary because a single transaction may affect revenues or expenses in more than one accounting period and also because all transactions have not necessarily been documented during the period. The determination of an objective net income as well as the correct balances on the Balance Sheet. There are two types of adjusting entries the deferrals or the prepayments and the accruals. They are further categorized into four types of adjusting entries which includes accrued revenues, prepaid revenues, accrued expenses and prepaid expenses. Accrued revenues which are also referred to as accrued assets refers to revenues whichhave already been earned but have not been paid for and thus have not been posted in the general ledger. These are adjusted in the financial statements by debiting the asset accounts recievable and crediting the the relevant revenue account. An example of accrued revenue may occur when an architecutral firm offers consultancy services of $ 1300 to a manufacturing enterprise but fails to bill its services untill next accounting period. An adjusting entry to record the income in the correct period would be done by Accounts Reciavable $ 1300 Consultancy Income $ 1300 Prepaid income refers to revenues or money recieved from clients before the services has been earned. ...
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