Accounting 2

Adjustments are important for several reasons which all have to do with profitability and liquidity. An adjustment entry affects the net income on an income statement and also affects the profitability comparison from one period to another. Adjustments also affect assets and liabilities on a balance sheet which gives valuable information about future incoming and outgoing cash flow. All of the information previously provided helps to determine management's performance in making sure they have satisfactory liquidity in order to meet the need for cash in order to pay for ongoing expenses. When there are transactions that cover more than one accounting period accrual accounting requires that adjusting entries be used. Each entry has a negative or positive affect on a balance sheet and income statement. There are four different types of adjustment entries and they are deferred expenses, accrued expenses, deferred revenue, and accrued revenue.

Deferred expenses are an expired portion of prepayment that is converted into an expense. An unexpired portion is continues to be an asset. A company such as Samsung Electronics Co LTD has a reasonable amount of deferred expenses listed on their balance sheet as of December 2008. (Bloomberg, 2011)

Accrued expense is an expense that has to be recorded in the same time period it was incurred regardless as to when it was paid. For 2011 Motorola had $471.0 million in accrued expenses which are needed in order to be able to make all of the electronics they sell. (Microsoft, 2012)

The next type of adjustment is deferred revenue and it's basically unearned revenue and is a liability because a manufacturing company such as Apple has an obligation to deliver goods and services in order to obtain a payment. And last but not least we have accrued revenue which is revenue a company such as Dell receives for performing a service or delivering goods and there hasn't been an entry made to the accounting records.

The best way adjustments can be recorded in a computerized system is when you enter them into the accounting software as credits and debits. The first step is to collect all of the information needed so make sure you get all receipts and expense reports. The next step is to enter in all transactions where credits are what the company earns and debits are what the company spends. Once everything is entered you can prepare an unadjusted trial balance. Then enter all adjustments in order to get an accurate balance. One you enter in all of your adjustments you can prepare and adjusted trial balance. When doing so you must remember that assets, liabilities, owners' equity, revenue, and expenses will include all adjustments made. If there are any discrepancies make sure they are investigated and corrected.

As with any other part of business accounting can run into ethical issues and should be promptly addressed. For example you find that you cannot correct any discrepancies