The role of mentorship in accounting careers

Accounting

Adjusting entries are required in order to ensure that the company's internal accounting records match up with accrual accounting standards (No author, 2012). These entries are typically made "just prior to issuing a company's financial statements" (Ibid.). The need for adjusting entries arises, often in small companies, when the company does not use accrual accounting in its daily business. If the company is using a cash accounting system, it must then make the adjusting entries to reflect how its statement should look if it used accrual accounting methods the entire time.

There are a number of examples of different adjusting entries that one can commonly see in a small manufacturing setting. One type of adjusting entry is for accruals. Companies accrue costs that have not yet been paid. For example, at our small manufacturing company we have a lease on the building that is paid on January 31 every year. When we produce the financial statement, we need to have an adjusting entry that shows the accrued lease expense, which is what we will have accrued from Feb 1 until Dec 13. This debt has been accrued, but has not been paid.

Another example of an adjusting entry is for prepaid items. A good example comes with our fire insurance. We pay that ahead every year so that we are covered. This costs us $2,000 and we pay it every December. We need to have an adjusting entry at year's end to reflect what happened to that money. It did not disappear into thin air, it was used to cover an expense for the entire next year.

A third type of adjusting entry is with inventory. Inventory levels change constantly and we always need to account for the latest inventory. There is almost always going to be a gap between the raw materials that we have purchased, what is in our raw materials inventory, what is in our goods in process inventory and what is in our finished goods inventory. We always need to make a series of adjusting entries at the end of each period to accurately reflect what our inventory levels are of each type.

A final type is with respect to depreciation and other non-cash items. We have cash accounting all year, but when we are putting our figures into the accrual accounting financial statements, we need to make sure we include non-cash items like depreciation as they are important to accrual accounting.

Such adjusting entries will help to improve the accuracy of financial statements. Adjusting entries is necessary because accrual accounting systems demand that the events are recorded accurately. They are not to be recorded strictly on the basis of cash transactions, and all of these adjustments serve to translate the accounting figures that arise from the cash accounting to accrual accounting by incorporating all of the different non-cash transactions and ensuring that every element of the income statement and balance sheet is correct.

On a computerized accounting system, there might be software that can actually make these entries. If not they will need to be entered manually into the system.

As with any accounting, there are certain ethical issues that need to be understood. The accrual statements are where we report our profits and losses. It is important that they are completed accurately. Any fraud is illegal and cannot be tolerated. We have an ethical duty to all stakeholders to ensure that the financial statements that are produced accurately reflect the financial condition of the company.

There are also potential issues with the cash accounting as well. The most important is that it is relatively easy, if the numbers are adjusted, for somebody to steal from the company. If people expect there to be a certain amount of cash on hand, they will not ask questions if that is the amount on hand. In order words, somebody stealing from the company is likely to want that covered up in the accounting records.