At the conclusion of each accounting period, adjusting entries must be made in order to ensure the accuracy of the financial statements. An adjusting entry is an entry made to ensure that each accounting period is assigned the correct amount of income and costs. As a result, all financial accounts are correct and up-to-date when they are presented at year-end.
An adjusting Entry example
Suppose a car shop has a three-month payment plan for its customers who need repair work done.
Cash expected to be received is recorded in accounts receivable in June. The adjustment entry will be made in August, when the customer submits payment. Adjusting entries are used to turn receivables into revenue in this situation.
Why the need for an adjusting Entry?
The matching principle is an accounting guideline that must be followed. According to the matching principle, revenue is recorded as soon as it is generated and costs as soon as they are incurred. It only pertains to the accrual accounting model, not the cash accounting model. Adjusting inputs aren't necessary if you're using the cash basis technique.
Significance of Adjusting Entries
Accurate and timely business transactions can be recorded through the use of adjusting entries. To keep track of your receivables and liabilities, as well as to discover the precise profit and loss of your firm at year-end, this is a great tool.
Your business' financial health will be skewed if you don't include adjusting entries in your financial statements. Expenses and liabilities will be minimized while net income and owner equity would be exaggerated. This is why tax and accounting professionals propose adopting the accrual basis and revising entries.
Following are some of the multiple choice questions on the Adjusting Entries with answers that will help the students in developing their knowledge.
Update and correct the accounts at the end of the period
balance the books at the end of the period
record the sales of the period
ensure the equality of the debits and credits
5. $3,000 worth of service has been provided to a customer who paid advance amount of $4,000. The accounting period has come to an end with 25% of the work undone. The following debit/credit is required:
7. Equipment costing $60,000 has useful life of 5 years and its estimated salvage value is $10,000. Depreciation is provided using the straight line depreciation method. At the end of one year which accounts will be debited/credited
8. On December 1, 2020, Republica Importing purchased $4,500 of supplies and recorded as an asset. On December 31, 2020, Republica checked supplies and found $1,200 in the inventory. Prepare the adjusting journal entry for December 31
20. A red Dodge Viper was bought on July 1 of the current year for $180,000. It is expected to last 20 years with 0 Salvage Value. Calculate the amount of depreciation as of December 31st of the current year using the straight line method of depreciation.
21. A silver Nissan 350Z was bought for $80,000 on January 1st of the current year. Calculate the depreciation for this vehicle as of December 31st of the current using the declining balance method (30%).
24. At the beginning of Year 1, the Supplies account had a debit balance of $2,300. During the year, the business purchased $900 of supplies. An inventory count at the end of the year revealed that $650 of supplies remained. The adjusting entry as a result of this information is:
42. On May 1, 2020, Lappy Services received a Php450,000, 9% note for selling an equipment not being used by the business anymore. The note is payable in 2 years. How much is the accrued interest income?
49. Office Equipment was purchased on May 1, 2017 at a cost of P 140,000 with a salvage value of P 20,000. The equipment’s useful life is five years. How much is the depreciation expense on December 31, 2017.