Accounting adjustments:

Accounting adjustments:  Why are they needed at the end of an accounting period ?

Objectives

1. Understand the importance of the adjustment process.

2. Comprehend the adjustment process.

   

3. Be familiar with types of adjustments.

Why are adjustments important at the end of  an accounting process?

¶         Adjustments are necessary to bring all the accounts(elements ) of the accounting equation up to date (accrual concept) (Warren, P. 87).

¶         Adjustments are essential for matching revenues and expenses ( matching concept)

     (Warren, P. 87).

Comprehension of the adjustment process.

¯                    The process of updating the accounts prior

    to preparing   financial statements to properly match 

    revenues and expenses is called Adjustment Process

¯   There are two type of adjustments:

ü  Deferral adjustments

ü   Accruals adjustments

(Warren, p.87)

Types of adjustments  (deferrals)   

¯  Deferral adjustments occur when transitions

   are recorded in a way that delay/defer

   the recognition of an expense/revenue ).

¯  Examples of deferrals:

ü  Prepaid expenses or deferred expenses

ü  Unearned revenues or deferred revenues

                (Warren,p.87)

Types of adjustments  (accruals)

¯  Accrual adjustments occur when a revenue or expense has been  earned or incurred

 but not recorded.

¯   Examples of accruals:

ü   Accrued expenses or accrued liabilities

ü     Accrued revenues or accrued assets

The importance of basic elements (conclusion)

¯  Only when ALL parties' transactions are cash transactions, adjustments are Not needed

In All other cases adjustment are a MUST prior to preparing .financial statements.

References

¯  Warren, S. C.( 2009).Survey of accounting.

   4th ed. Ohio: South-Western Cengage learning