Do itDuring year 1,Services Ltd invoiced its customers $100 000 for services performed. It received $75 000cash in year 1 and the balance in year 2. Expenses paid during year 1 amounted to $45 000 but another$13 000 of expenses were not paid until year 2. Calculate the profit for year 1 using (a) accrual-basedaccounting and (b) cash-based accounting.
3.3 The basics of adjusting entriesLEARNING OBJECTIVE 3.3Explain why adjusting entries are needed and identify the major types ofadjusting entries.
In order for revenues and expenses to be recorded in the correct accounting period, adjusting entries aremade to revenue and expense accounts at the end of the accounting period. In short,adjusting entriesareneeded to ensure that the recognition criteria are followed for assets, liabilities, revenues and expenses.The use of adjusting entries makes it possible to produce accurate financial statements at the end ofthe accounting period. Thus, the statement of financial position reports appropriate assets, liabilities andequity at the end of the reporting period, and the statement of profit or loss shows the appropriate profit (orloss) for the period. Adjusting entries are necessary because the general ledger may not contain up-to-dateand complete data, for the following reasons.1. Some events are not journalised daily because it would not be useful or efficient to do so. Examplesare the use of supplies and the earning of wages by employees.2. Some costs are not journalised during the accounting period because the economic benefits expire withthe passage of time rather than as a result of recurring daily transactions. Examples include buildingand equipment deterioration, rent and insurance.3. Some items may be unrecorded. An example is an electricity or telephone bill that will not be receiveduntil the next accounting period.Adjusting entries are required every time financial statements are prepared. An essential starting pointis an analysis of each account in the trial balance to determine whether it is complete and up to date forfinancial statement purposes.None of the transactions demonstrated in this chapter and the end-of-chapter activities include theeffects of the goods and services tax (GST). Section 4.6 in chapter 4 introduces transactions with GST.