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Question

Which of the following transactions require adjusting entries?

  • Supplies were purchased at the beginning of the year, but not all were used.
  • A 24-month insurance policy was prepaid.
  • Equipment was purchased in the middle of the year.
  • Six months of rent were paid in advance.
  • An advance payment was received from a customer earlier in the month, but only partially earned by the end of the month.
  • A one-month premium on an insurance policy was paid.
  • An employee was paid his weekly wages in full at the end of the week.
  • Rent was paid for the month.
Answer

Adjusting entries are made to journal entries of transactions that are already recorded. Transactions (1), (3), (5), (6), and (8) require adjusting entries as follows: (1) Six months of rent were paid in advance, (3) A 24-month insurance policy was prepaid, (5) Supplies were purchased at the beginning of the year, but not all were used, (6) An advance payment was received from a customer earlier in the month, but only partially earned by the end of the month, and (8) Equipment was purchased in the middle of the year. An adjustment entry is required in the closing of an accounting cycle to reflect any unreported income or expenses during the time.

Adjusting entries ensure that financial statements are accurate and up-to-date. An adjusting entry is made when a transaction is not properly recorded at the time of the transaction or has not yet been recorded. It ensures that the financial statements are accurate by reflecting the actual amount of income or expenses earned or incurred during the period. For example, if rent is prepaid for six months, it should not be recorded entirely as an expense in the month it was paid. Instead, it should be recorded as an asset and then expense should be recognized each month as services are received. The same concept applies to other transactions that require adjusting entries.