Question

1. What is the purpose of adjusting entries?
2. Name the four general types of adjustments.
3. Give three examples of accrued expenses.
4. Briefly explain why it is difficult for accountants to determine whether or not
revenue has been earned if the sales process is not complete.
5. Give an example of business or industry where customers usually pay for the
product or service in advance.
6. What type of account is unearned revenue?
7. When should a company reclassify unearned revenue to revenue?
8. Why do companies produce a second trial balance? When is this second trial
balance prepared?
9. Why do accountants prepare closing entries?
10. Into which account are revenues and expenses closed?

Answer 1

1) Th purpose of adjusting entries are to make the books of accounts and financial statements comply with accounting principles like accrual basis of accounting and matching concept of revenue and expenditure.

2) 4 general types of adjustment

Accrued Expense, Accrued Revenue, Deferred Expense, Deferred Revenue

3) Examples of Accrued Expenses

a. Interest accrued on bonds

b. Salaries and Wages accrued

c. Utilities consumed but not billed

4) To recognise in the revenue in the books it must meet certain criteria and one of such criteria is the sales process must be completed in full and not part. Hence if a sales process is not complete, it is difficult to determine the revenue

5) Construction business is such type of business where the customers make advance payments periodically. Movie theater is also an example of such business.

6) Unearned Revenue is such account which records all the amount received for a service to be rendered in future or goods to be supplied in future

7) When such services are rendered or goods supplied for which we received advance payments earlier, we reclassify unearned revenue as Revenue

8) Second trial balance is prepare to check the equality between debits and credits after the adjusting entries

9) The purpose of closing entries is to close all the temporary accounts and also to reconcile the company's accounts (trial balnace, income statement, balance sheet)

10) Revenues and Expenses are closed by transferring the balance to Income Statement or Profit and loss account