Question

2. Please prepare a response indicating the reason why adjusting entries are required, the potential impact of this information on financial statement reports and the importance of these adjustments. 3. Two bookkeepers get into a heated discussion about whether closing entries should be made before or after preparing the financial statements. They have come to you to resolve this issue and have agreed to accept your position. Prepare a written response explaining the purpose of closing entries and whether they should be made before or after preparing the financial statements

Answer 1

2. Adjusting entries are prepared to reflect the financial statements as per accrual method of accounting and show those costs and revenues that relate to the current period consideration only. If the adjusting entries are not made then the profit or loss of the company can be underestimated or overestimated. Also the balance sheet may report incorrect assets and liabilities and the accounts may not tally at all.

3. Closing entries are prepared so that the all revenue and expenses are made zero before the start of the new accounting period. It is used to transfer all the temporary account balances to permanent accounts at the end of the financial year and before preparing financial statements. All the temporary accounts are closed to income summary and the balance sheet.