 Hello in this discussion we will discuss the discussion question of explain the purpose of adjusting entries at the end of a period and provide an example of an adjusting entry. When seeing an essay question such as this we're thinking about those types of transactions that are happening at the end of the time period whether it be the month or year in order to make sure that the financial statements are on an accrual basis at that point in time. So it's important first to kind of think of the ordering of things have a broad picture of how things are happening what order the accounting cycle will happen through and first thing's going to happen is we're going to record a bunch of transactions as it happens invoices bills and checks and whatnot. Then at the end of the time period we have this what we call an adjusting process and you kind of want to draw a line in your head possibly even think about it as an outside CPA firm doing the adjusting process to make it very distinct as this is going to be a different process than the normal day-to-day journal entries we typically often even pull that information out of the normal accounting system have a separate worksheet to do the adjusting process and we typically think of that as an unadjusted trial balance from the end of the time period as of the end of the month or year that we then put into our worksheet and then we make our adjustments to make the adjusted trial balance so why do we need to do that what are the adjusting entries and what's the purpose of them now many times people think the purpose of the adjusting entries are just to correct errors that happen and that's not necessarily true it's not true that our adjusting process is to correct errors although while doing the adjusting process we may find errors that aren't part of the normal adjusting process that we have to fix during that same time period but the normal adjusting entries we actually plan to have into the system most of the time we know that some things just are are going to need some type of adjustments and those adjustments will be things that where they're not lining up that the cutoff date is not lining up specifically to to match up with the accrual principles of revenue recognition and the matching principle so that's what our adjusting entries are going to do they're going to make sure that the proper amount of revenue expenses are recorded in the proper time period and there's going to be normally specific accounts that we always going to have adjustments to so when you think of the example for adjusting entries you can think you can visualize basically what you think the trial balance looks like and go through those accounts remember that cash will not be included but accounts receivable we may have an adjusting entry if for example an invoice went out just after the time period just after the month in let's say when the financial statements of a year end when we're making the financials went out but the work was done prior to that so that means that the invoice went out after the time period but the work was actually done before the cutoff date and therefore we should really bring it back because even though software will record the invoice or the revenue at the point in time invoice was generated we really should be recording it at the point in time the work was done so that's an example we can pull back if we if we go through in our head all the all the balance sheet accounts and try to think if they're going to need adjustments we could say supplies is something that's going to need an adjustment typically and that's not going to be an error again on the on the reporting side because we're going to tell the accounting department just every time you buy supplies just keep on buying it and at the end of the time period we'll count it and we'll make an adjustment in accordance with how much has been used based on that physical count so we'll do that for supplies we may do that for inventory depending if it's a perpetual system or a periodic system but we'll probably do a physical count well we should do a physical count at some point at any rate depreciation if we think about equipment equipment is something that we're going to purchase and we put it on the books as an asset and again it's something that we basically told the accounting department hey whenever you buy equipment you put it on the books as an asset you don't expense the equipment and then we'll just go in there at the end of the time period and make these adjustments at the end of the time period recording the depreciation related to it meaning we're allocating the cost of the equipment in accordance with when it has been used in accordance with the matching principle and we'll record the accumulated depreciation so that would be an example if we look at some unearned revenue on the liability side represents revenue that has been earned which we have not yet revenue sorry revenues cash or some type of payment that we have received that we have not yet earned so it's on the books as a liability because we got money but we couldn't record the other side of it being revenue because we haven't earned it under the accrual principle so again our accounting department we're just going to say hey whenever that happens if you get cash for work that hasn't done yet put it into unearned revenue and then at the end of the time period we'll go through there and we'll say hmm how much of this revenue have we actually earned we'll take it out of the liability of unearned revenue put it into the revenue account at that time so all of these types of transactions are going to have to do with these timing issues and remember that that's how the system is set up so we set up the system so that you know the system can work the way it works and be as efficient as possible and then we're just going to go in there and make those adjustments on a periodic basis so that we can make those reports as accurate as possible on those periodic bases and then make the best decisions based on those time periods another good example is the payroll payroll is often something that has a level of complexity that we don't want to mess with it whatever the payroll cycle is uh we'll we'll let the payroll cycle run it'll typically be closer to a cash basis because we're gonna we're gonna pay people whenever they pay people we pick we typically will run the payroll at that time there might be a difference between the pay period and and when we when we record it but in any case uh whatever that that cycle is it doesn't typically line up to months or years exactly so the the pay periods in other words will not line up to uh the end of the time period and that's okay because we're gonna say hey payroll is difficult we don't want to mess with your with with the payroll time period whatever works best to get those reports you know fine that's good and then we'll just make that adjustment at the end of the time period again the adjustment not an error adjustment we're not adjusting an error a problem that the payroll department did we were saying payroll you know you do whatever you got to do to to get that payroll done in the in whatever time frame works best and we'll just make the adjustments to align it to the cutoff dates as of the end of uh the month or year