Question

Joan Miller owns an advertising agency. One of the adjustments her accountant made at the end of July was $360 for unpaid wages of the secretary. Joan Miller might ask, “Why go to the trouble of making this adjustment? Why worry about it? Doesn't everything come out in the end, when the secretary is paid in August? Because wages expense in total is the same for the two months, isn't the net income in total unchanged?” Give three reasons why adjusting entries can help Joan Miller assess the performance of her business. (Net income was $1,600.)

Answer 1

Adjusting entries are journal entries made at the end of an accounting cycle to update certain revenue and expense accounts and to make sure you comply with the matching principle. The matching principle states that expenses have to be matched to the accounting period in which the revenue paying for them is earned.

Three reasons why adjusting entries can help Joan Miller assess the performance of her business are as follows:

1. By making this adjustment entry for unpaid wages of $360 Income statement for the month of July will show true net profit.
2. If balance Sheet were to be made at the end of July it will show actual status of payables of the company.
3. It shows true and fair view of the state of affairs of the company.