Adjusting entries why are they necessary

The accountant examines a current listing of accounts—known as a trial balance—to identify amounts that need to be changed prior to the preparation of financial statements.

Basically, the income summary account is the amount of your revenues minus expenses. Accountants perform closing entries to return the revenue, expense, and drawing temporary account balances to zero in preparation for the new accounting period.

First, adjusting entries are recorded at the end of each month, while closing entries are recorded at the end of the fiscal year.

And second, adjusting entries modify accounts to bring them into compliance with an accounting framework, while closing balances clear out temporary accounts entirely. When entries 1 and 2 are posted to the general ledger , the balances in all revenue and expense accounts are transferred to the Income Summary account.

The income summary balance agrees to the net income reported on the income statement. After closing entries have been journalized and posted, all revenue accounts such as Service Revenue and all expense accounts will have a zero balance. Revenue and expense accounts are all closed to the Income Summary account as part of the closing journal entries.

Adjusting entries for the depreciation of fixed assets enables companies to determine the correct value of the assets as well as the net profit and financial position of the company for the specified period of the year.

The entries are also important in updating financial statements as they help organizations to eliminate obsolete inventory and adjust cash balances for any items noted in the bank reconciliation. World View. More From Reference. Adjusting entries update the financial records for events that have occurred. However, no document for dealing exists. There are two main types of payments.

Accruals record incomes and expenses before any activity gets recorded. These cover payrolls owed to workers or income taxes owed to the government. Deferrals refer to taxes and expenses that relate to a prior transaction.

For example, businesses typically pay for an allowance policy for several months in progress. The accountant reports this transaction as an asset because the organization will receive the benefit of being protected for several months.