Why Adjusted Entries Are So Important

At the end of one accounting period, such as 30 June in Australia, it becomes a very busy time. The financial statement of the companies can hardly be distributed to stockholders or other users on that day. The delays are always caused by the adjustment for the statements at the end of the period. Although the process of adjusting entries can result in much delay in preparing the financial statement, the importance of adjusting entries cannot be ignored.

In the financial statement of a company, the amounts should be reported correctly to indicate the actually financial position and comprehensive income. However, at the end of an accounting period, the adjusting entries can be complex and prone to error. In the process of accounting, there are transactions in different periods, which will make statements incomplete. If the statements are delivered to investors, lenders or other users with incorrect information, the users will be misled when they try to analyse the past business or forecast the future based on the financial information. Therefore, the management of a company should make sure that the data in the financial statements is reliable. For the users of the financial statements, the amounts of revenue and expenses are very important.  The process of adjusting entries should base on the matching concept, which defines the rules to record the costs and revenues for a certain accounting period. Revenues should be recorded when they are earned and expenses should be recorded when they are incurred regardless the tome of cash receipts or payments occur. Many transactions take place over more than one period, such as the prepaid fees or owing wages. Using the adjusting entries, the company can update the records and ensure that the data in the financial report reflects the accurate financial information in this period.

If cash can be paid or received when the company incurs revenues or expenses, the revenues and expenses are easy to be calculated. However, when the company performs services or provides products, the cash may be received in another accounting period. Also, when expenses such as salaries are incurred, the cash payment may be completed at a different time. For a company, it will be too costly if the revenues and expenses are recorded daily. At the end of an accounting period, adjusting entries are required to place the revenues and expenses in the right period and report the reliable amounts of revenues, expenses, assets, liabilities and shareholders’ equity.