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

Why are adjusting entries passed at the end of an accounting period under the accrual basis of accounting?

Adjusting entries are passed so that revenues and expenses are recorded in the period to which they relate, following the accrual basis and matching concept. They are not meant to agree the trial balance or fix clerical errors, and they go beyond recording mere cash receipts and payments.

  1. ATo ensure revenues and expenses are matched to the period to which they relateCorrect
  2. BTo make the debit and credit totals of the trial balance agree
  3. CTo correct clerical mistakes made in the journal during the year
  4. DTo record only cash receipts and payments of the period

Explanation

Adjusting entries bring in accrued, prepaid and unearned items so that income and expenses belong to the correct period, in line with the matching concept. They do not serve to tally the trial balance, because the trial balance already agrees before adjustments. Correcting clerical mistakes is rectification, not adjustment.

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