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CMA Foundation · Fundamentals of Financial and Cost Accounting · Adjustment Entries and Rectification of Errors

Adjusting entries are passed at the end of an accounting period mainly because:

Adjusting entries are passed so that revenues earned and expenses incurred in a period are matched and recorded, regardless of when cash is received or paid. This follows the accrual and matching concepts, giving a correct profit and financial position at period end.

  1. ACash receipts and payments must be recorded on the date of actual settlement only
  2. BThe trial balance never agrees without them
  3. CRevenues earned and expenses incurred in the period must be matched, irrespective of cash movementCorrect
  4. DThe auditor requires all ledger accounts to be closed every month

Explanation

Under the accrual and matching concepts, income and expenses of the period must be recognised whether or not cash has changed hands. Adjusting entries bring the books to this position. Option A describes the cash basis, which adjustments depart from. The trial balance can agree even without adjustments.

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