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What is the purpose and importance of making end of year adjustments?
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Purpose and importance of making end of year adjustments are as under:
Before financial statements are prepared, additional journal entries, called adjusting entries, are made to ensure that the company's financial records adhere to the revenue recognition and matching principles. Adjusting entries are necessary because a single transaction may affect revenues or expenses in more than one accounting period and also because all transactions have not necessarily been documented during the period.
To close Accounting Year Cycle related to Income Statement.
To match the expense & revenue to the accounting year.
Most Important Purpose is to apply the matching principle.
-I would like to explain that the End of period journal entries we make to the accounts of prior to the preparation &distribution of the financial statements for a given accounting period.
End -of- period adjustments ensure that the financial statements reflect the true financial position and performance of a of a business by allocating to the appropriate period the income earned and expenses incurred.
-They are adjusting-journal- entries & accounting which include accruals,deferrals and assets value adjustments.
-The revenue recognition principale is the basis for making adjusments at the year end .
It is according to the "periodic Principle" and also "Accrual Basis" in Financial Accounting, we should make sure that the period is adjusted only with ALL it Revenues and Expenses. not more, Also other following or subsequent years has no effect with the current audited financial statement for this period. Depreciasion as a non-cash expense should also be calculated and well adjusted. All other answers are great.
It's very important to apply the matching and accrual basis of accounting as it works to carry every period with its expenses and revenues
to meet the GAAP Standard which is preparing statements for specific period fairly and accurately
Accordance with the principle of accrual to meet the terms of the period of the expenses and the corresponding revenue