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Accounting Cycles
Explain why adjusting entries are necessary.
Adjusting entries is essential because the adjustments made bring the financial statements up to date. It presents accurate balance of the financial statements and this will help the company to adhere to the returns recognition and the matching principles of the organization. Moreover, a single transaction may affect the returns or expenses in more than one accounting period thus it is necessary to make adjustment entries. This is because all the transactions that have not been documented during the financial period of the year will be adjusted thus enabling the organization to make necessary changes. In addition, the accountant clerk needs to make adjusting entries because each adjustment entries usually affect the income statement account. However, if the adjustment entries are made, it is easier for an accountant clerk to avoid expenses of understating or overstating a balance sheet (Berry, 2011).
Describe the 4 types of adjusting entries, and provide a manufacturing industry example of each.
An accrued expense is one of the adjustment entries whereby expenses are incurred but not yet paid in cash or recorded. For instance, let has assume the General Motors industry provided $289 worth of consulting services over the past month. Thus, the accounting clerk will prepare a trial, financial statements and closing entries by adjusting entries to account for the unbilled services. Another adjusting entry is accrued revenues. These are revenues earned but they are not yet recorded down or received in cash. These revenues are recognized but their cash payments have not yet been recorded. For instance, the Electronic industry may deliver their goods and the accountant clerk will record down as receivable goods even though the expenses have not been paid for thus the information is recorded in a payable account.
Consequently, prepaid expenses are whereby expenses have been incurred but they are not yet recorded as assets. For example, let has assume the Home appliances industry paid $450 insurance three months ago and they still have three paid months remaining on the policy after this accounting period. Thus, to reflect accurately on the value and expenses of the remaining policy, the accounting clerk can make adjustments to balance the debits and credits. Lastly, unearned revenue is whereby revenues are received in cash and then recorded down as liabilities. For example, Pharmaceutical industry may purchase an annual service contract from another company worth $4890, which was paid upfront. In case the months of the contract are within the accounting period, this means that the following months of the contract’s revenues are unearned.
Describe how these entries would be recorded in a computerized accounting system.
There are various steps followed when recording the above adjustments in the computerized accounting systems. The first stage of a computerized accounting system in transaction process is data entry, which is followed by data validation. Data validation detects and corrects errors of the actual input data. Processing and revalidation of data is done when online transaction processing provides a valid data that has been fed into the system. Validation process ensures the transaction in terms of data delivery is duly completed. The last entry system is storage whereby the processed actions described from the first step results into financial transaction data. This makes it clear that only the stored transactions are processed and stored well in the database (Bodnar and Hopwood, 2001).
Describe 1 ethical issue that could result from the preparation of these manufacturing entries.
One of the ethical issues that could result from the preparation of these manufacturing entries is good economic decision making. This is crucial because it will enable the accounting clerk to make better decisions. This will enable him or her to utilize economic resources of the industry thus contributing to economic expansion. In addition, the cost information can be disseminated in a manner that can enable the accountant clerk to focus on the business components or held accountable for business activities. For instance, particular reporting periods may be replaced with real time data and this will enable the accounting clerk to make quick responses to the changing situations.
References
Berry, L. E. (2011). Financial accounting demystified. New York, NY: McGraw-Hill.
Bodnar, G. H., & Hopwood, W. S. (2001). Accounting information systems. UpperSaddleRiver,
N.J: Prentice Hall.
Warren, C. S., Reeve, J. M., & Fess, P. E. (2005). Financial & managerial accounting. Mason,
Ohio: Thomson/South-Western.
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