Question

Why are adjusting entries needed at the end of an accounting period?

Answer 1

Adjusting entries are required for calculating the net profit or loss at the end of an accounting period.

Through adjusting entries the income and expenses for the accounting period are closed by allocating those incomes and expenses to the respective accounting period. ie. Irrespective of payment of expenses in cash and receipts of income in cash, the income and expenses are allocated to the period in which they belong.

Adjustment entries involves transferring all the expenses and incomes to income summary.

When accrual basis of accounting is followed, adjusting entries are used.