Cornerstones of Financial Accounting
4th Edition
ISBN: 9781337690881
Author: Jay Rich, Jeff Jones
Publisher: Cengage Learning
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According to the accrual method of accounting, businesses make adjusting entries to ensure that their financial statements are correctly depicting their financial situation and performance. No matter when cash transactions take place, adjusting entries are required to record revenues when they are generated and expenses when they are incurred (Weygandt et al., 2022). In order to guarantee that financial statements present an accurate and impartial picture of their company's financial health, these entries help in bringing financial records into compliance with the revenue recognition and matching standards.
In order to account for things like accumulated revenues, accrued expenses, depreciation, and prepaid expenses, adjusting entries are usually made at the conclusion of an accounting period prior to the preparation of financial statements (Kieso et al., 2020). By implementing these changes, businesses avoid making false representations in their financial reports, which enables stakeholders to make better decisions. Financial statements may overestimate or understate financial performance in the absence of correcting entries, which could result in inaccurate conclusions (Warren et al., 2021).
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