In reviewing the accounts of Marylee Co. at the end of the year, you discover that adjusting entries have not been made.
Write a memo to Mary Lee Virgil, the owner of Marylee Co., that explains the following: the nature and purpose of adjusting entries, why adjusting entries are needed, and how her financial statements could be affected by the lack of adjustments. Give specific examples that are related to the various types of adjusting entries.
An adjusting journal entry is an entry in a company's general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period.
If expenses are incurred in 2019 but paid in 2020, omitting the adjusting entry will cause net income to appear higher in 2019 due to the expenses not being recorded.
The five types of adjusting entries are:
- Accrued revenues,
- Accrued expenses,
- Deferred revenues,
- Prepaid expenses,
- Depreciation expenses.
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