Question

Why do companies record adjusting journal entries at the end of the accounting periods? Give an example of unearned revenue and accrued expense

Answer 1

Accounts are maintained on an accrual system of accounting as per the generally accepted accounting principle. Hence, at the end of the accounting period, there will be revenues which are earned but not received or amount received for a future service to be provided. Similarly for expense as well, expense would have been incurred but not paid as at the end of the accounting period or payment is made in advance for a future service to be received. Hence, adjusting journal entries are posted at the end of the accounting periods to ensure correct presentation of the income of the company.

Unearned revenue - If a customer pays an amount in advance for a service to be rendered in future. If the service is performed by the end of the accounting period then necessary journal entry needs to be posted.

Accrued expense - Expense incurred but not paid by the company as at the end of the accounting period.