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‘Why are adjusting entries necessary? Surely they cause too much delay in preparing
financial statements, and the financial effect of any entries made is immaterial in the long
Adjusting entries are essential to close the books of accounts and reflect true and fair view
of financial positions of an organization to ensure that financial statements are free from any
material misstatements and truly reflect the financial performance of the entity.
Organizations’, which follow accrual system of accounting, ensure that adjustment entries
are passed with respect to assets, liabilities, incomes and expenses so that accounting entries are
posted as per the respective accounting period. In some cases, the size of these entries are not
material enough to impact the financials, yet passing of such entries are essential to reflect true
and fair view. However, in many cases, the size of entries is impactful with respect to accounting
for depreciations, provisions, advances, and many more. The volume of work can be reduced
provided information with respect to accounts and amounts are known prior to closure of
accounting period or accounting date. The organization should design the process in a manner that
all incomes are booked against pre-approved commercials and expenses are booked against
purchase orders. Timely provisions should be made against contractual obligations. In a manner,
regular accounting for adjusting entries can reduce the lead-time required for book closure.
ABC Publishing Ltd sells a monthly political journal on credit. The accounting records at
Balance % uncollectable
(Allowance for doubtful debts has been made based on ageing of receivables)
Stock Card
Purchases Sales Balance
Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost
1-Jan Opening Inventory 900 $7.00 $6,300.00
6-Jan Purchases 400 $7.05 $2,820.00 1,300 $7.02 $9,120.00
5-Feb Sales 1,000 $7.02 $7,015.38 300 $7.02 $2,104.62
17-Mar Purchases 1,100 $7.35 $8,085.00 1,400 $7.28 $10,189.62
24-Apr Purchase Return (80) $7.35 ($588.00) 1,320 $7.27 $9,601.62
4-May Sales 700 $7.27 $5,091.77 620 $7.27 $4,509.85
26-Jun Purchases 8,400 $7.50 $63,000.00 9,020 $7.48 $67,509.85
11-Aug Sales 1,800 $7.48 $13,472.03 7,220 $7.48 $54,037.82
19-Aug Sales Return (20) $7.48 ($149.69) 7,240 $7.48 $54,187.51
11-Sep Sales 3,500 $7.48 $26,195.62 3,740 $7.48 $27,991.89
6-Oct Purchases 500 $8 $4,000.00 4,240 $7.55 $31,991.89
11-Dec Sales 3,100 $7.55 $23,390.30 1,140 $7.55 $8,601.59
31-Dec Closing Inventory 1,140 $7.55 $8,601.59
Good Stationery
Income Statement
for the year ended December 31, 2010
Income
Sales (1000x12 + 700x12.1 + 1800x13.25 + 3500x13.5 + 3100x15) $138,070
Less: Sales Return and Allowances ($265)
Net Sales $137,805
Financial Statement Analysis are based on ratios and comparative evaluation. There can be several
1. Costs are allocated across several periods basis estimates and ratios can only be accurate
as the estimates.
2. Finance statements are prepared based on cost principle and hence ignore the impact of
and others. Hence the comparison becomes difficult and ratios gets impacted based on
methods adopted.
4. Not all intangible assets are recorded in the balance sheet, but expenses incurred to create
such assets are charged as an expense immediately and hence distort the income statement.
5. Management Team may intentionally show better results under undue performance
pressure and hence make the entire financial statement subject to fraud and governance
issue.
6. In case of cyclical industry, comparison become difficult for organizations having different
8. Business condition and circumstances of one year may not be similar to subsequent or past