1. Explain the purpose and necessity of adjusting entries.
2. List examples of several typical accounts that require adjusting entries.
3. Define an “accrued expense.”
4. Provide examples of adjusting entries for various accrued expenses.
5. Describe the reason that accrued expenses often require adjusting entries but not in every situation.
Question: “How Does an Organization Accumulate and Organize the Information Necessary to Prepare Financial Statements? “ as “analyze” and
“record.” A transaction occurs and the financial effects are ascertained through careful analysis. Once
determined, the impact an event has on specific accounts is recorded in the form of a journal entry. Each of the
debits and credits is then posted to the corresponding T-account located in the ledger. As needed, current balances
can be determined for any or all of these accounts by netting the debits and credits. It is a system as old as the
painting of the Mona Lisa.
The third step in this process was listed as “adjust.” Why do ledger account balances require adjustment? Why
are the T-account totals found in Figure 4.3 “Balances Taken From T-accounts in Ledger” not simply used by the
accountant to produce financial statements for the reporting organization?
Answer: Financial events take place throughout the year. As indicated, journal entries are recorded with the
individual debits and credits then entered into the proper T-accounts. However, not all changes in a company’s
accounts occur as a result of physical events. Balances frequently increase or decrease simply because of the
passage of time. Or the impact is so gradual that producing individual journal entries is not reasonable. For
example, salary is earned by employees every day (actually every minute) but payment is not usually made until
the end of the week or month. Other expenses, such as utilities, rent, and interest, are incurred over time. Supplies
such as pens and envelopes are used up on an ongoing basis. Unless an accounting system is programmed to
record tiny incremental changes, the financial effects are not captured as they occur.