In order to ascertain the fair and true results of a business for a particular period, it is essential that all the Expenses and revenues related only to that financial period or year should be considered. If Financial Statement for 2016 are prepared, then the expenses and Revenue related to 2015 and 2017 should not be considered, the focus will be on 2016 incurred expenses and earned revenues. Adjusting entry is needed to ensure that the revenue recognition and expense recognition principles are followed.The Trial Balance may not contain up-to-date and complete data for several reasons:
- Some events are not recorded daily because it is not efficient to do so
- Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions
- Some items may be unrecorded.
Adjusting entries are required every time a company prepares financial statements. Every adjusting entry will include one Income statement account and one Balance Sheet account. Cash is not adjusted at the end of the accounting period, thus should not use cash in the adjusting process Adjustments are made to assign amounts of revenue or expense to the proper accounting period before finalizing the Books of Accounts for the fiscal period. The records of such transactions in the book of prime entry are called adjustments.
Types of Adjusting Entries
An adjustment means to make a correct record of a Accounting Transaction which has not been entered or which has been entered but in an incomplete or wrong manner. Adjusting entries can be classified as:
Each of above type of adjusting entry has has subcategories.