BUS103: Introduction to Financial Accounting

3a. Identify why adjusting entries are necessary

Failure to record adjusting entries at the end of an accounting period results in inaccurate income statements and balance sheets.

1. Give examples of accounts that require adjusting
2. Give examples of the effects of adjustments on financial statements.

Learn about the necessity of adjusting entries in The Need for Adjusting Entries on pages 147-149 and the consequences of failing to record adjusting entries in Effects of Failing to Prepare Adjusting Entries on page 166.

 

3b. Distinguish among various types of adjusting entries

The matching principle is the reason adjusting entries for prepaid assets, accrued expenses, accrued revenues, depreciation, and unearned income are necessary when using accrual basis accounting.

Explain why cash basis accounting does not require adjusting entries for prepaid assets, accrued expenses, accrued revenues, depreciation, or unearned income.

The cash basis of accounting is compared to the accrual basis of accounting in Cash versus Accrual Basis Accounting on pages 145-146. Read more about the various types of adjusting entries in Classes and Types of Adjusting Entries on pages 149-151.

Unit 3 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

• Accounting period
• Accrual basis of accounting
• Accrued assets and liabilities
• Accumulated depreciation
• Adjusting entries
• Book value
• Cash basis of accounting
• Contra asset account
• Depreciable asset
• Estimated residual value
• Estimated useful life
• Fiscal year
• Matching principle
• Prepaid expense
• Unearned revenue