Ledger Question:
Explain why do companies need adjusting journal entries?
Answer:
Current account balances may not represent correct balances due to following reasons:
a. Company made mistakes in preparing journal entries in the past.
b. Accounting records are not updated to reflect new transactions or amount changes in previous transactions.
Adjusting journal entries are usually prepared at the end of an accounting period to update account balances to reflect correct balances as of the balance sheet date (the date at the end of an accounting period).
The timing differences in recognizing revenues and expenses between accrual basis and cash basis accounting are frequently corrected by adjusting journal entries.
a. Company made mistakes in preparing journal entries in the past.
b. Accounting records are not updated to reflect new transactions or amount changes in previous transactions.
Adjusting journal entries are usually prepared at the end of an accounting period to update account balances to reflect correct balances as of the balance sheet date (the date at the end of an accounting period).
The timing differences in recognizing revenues and expenses between accrual basis and cash basis accounting are frequently corrected by adjusting journal entries.
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