Adjustments for Financial Reporting

This chapter dives deeper into the importance of making proper adjustments so that the financial statements reflect the current condition of the organization. One of the main principles of accounting is accurate and honest presentation of the financial condition of an organization. Without the proper posting of adjustments and correcting entries, the financial statements will be incorrect. Accounting is typically done within a specified period so that end users can assess the performance of a business entity. This section also discusses accounting periods, fiscal years, calendar years, adjusting entries, the matching principle, and the two classes and four types of adjusting entries.

Effects of failing to prepare adjusting entries

Failure to prepare proper adjusting entries causes net income and the balance sheet to be in error. You can see the effect of failing to record each of the major types of adjusting entries on net income and balance sheet items in Exhibit 18.

Using MicroTrain Company as an example, this chapter has discussed and illustrated many of the typical entries that companies must make at the end of an accounting period. Later chapters explain other examples of adjusting entries.