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Why are Adjusting Entries Important ?

>> November 29, 2009

Adjusting entries are the part of journal entries and every business organisation makes adjusting entries in the end of accounting period . These entries are so important because after this net profit or loss and financial position can be recognized in same accounting period . Because , these transactions or event happens usually at the end of an accounting period , so , accountant has to pass them when these actually occurred .
  1. Adjusting entry of closing stock is needed to determine the correct value of gross profit and cost of goods sold . After passing this adjusting entry , closing stock will go to credit side of trading account and after this gross profit can be calculated .
  2. Adjusting entry of depreciation is needed to determine the correct value of net profit , fixed asset and financial position. Because we can not pass this entry regularly because depreciation only come into existence after use of fixed asset .
  3. Making adjusting entry of outstanding expenses is also very necessary because , it will show the correct amount payable to third party and will also show the correct expenses for the period because in this entry we have to debit expense and credit outstanding expense for third party account .
  4. Making adjusting entry of advance expense is also very necessary because after this we can deduct advance expense from expense and this will be charged in next accounting period when these expenses will due .
  5. Making adjusting entry of accrual revenue and advance revenue are very important just like outstanding expenses and advance expenses because it direct effect will be the final account , unearned or accrual revenue means revenue earned but not yet received in cash , after recording it as adjusting entry we can add it in current period respective revenue and it will show correct net profit and we can also add it as asset of business. Advance or unearned revenue's adjusting entry is debit revenue account and credit advance revenue account . It means decrease the value of revenue with same amount in profit and loss account because all revenue accounts are credit under third rule of nominal account but this entry will be helpful that we can show it as revenue when we earn it in next accounting period .

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